The US South Central storage region could see an early start to mid-summer withdrawals this month as strong power burns and record price premiums east of Henry Hub keep spot gas supply in high demand.
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For the week ending July 8, Platts Analytics is projecting a net withdrawal from South Central gas storage in the range of 7-10 Bcf, potentially reducing inventory levels there to as low as 880 Bcf. A drawdown at the higher end of that range would expand the region's storage deficit to nearly 150 Bcf below average, or it widest since early April, data from the US Energy Information Administration shows.
The projected drawdown to stocks comes ahead of the South Central region's historic mid-July start to the withdrawal season when its salt dome inventories are typically called upon to meet peak-summer gas demand from power generators, and more recently, from the region's LNG export terminals.
This summer, though, record demand and surging basis premiums pose an outsized risk of larger drawdowns that could potentially jeopardize the region's pre-winter inventory build.
Strong gas demand in the South Central storage region is likely coming mostly major consumer markets concentrated along the Gulf Coast – including coastal Texas, Louisiana, Mississippi and Alabama.
Home to five of the US' seven operational LNG export terminals, the Gulf Coast market accounts for about 90% of US feedgas demand. Refineries, petrochemical plants, equipment manufacturers, and other heavy industry along the Gulf Coast also make the region a major industrial gas consumer.
While demand from both sectors is higher this summer, the largest annual increase in gas demand this season appears to be coming from power generators. In the US Southeast – which includes East Coast states outside of the South Central region, like Florida, Georgia and the Carolina – gas-fired power demand is up nearly 2.5 Bcf/d summer-over-summer to trend at an average 13.8 Bcf/d from June 1 to date, data from S&P Global Commodity Insights shows.
Along with a roughly 2.3 Bcf/d increase in LNG exports and a combined 400 MMcf/d increase in residential-commercial and industrial consumption this summer, demand in the Southeast is now outpacing supply at some downstream locations, fueling previously unseen price premiums.
Locations east of Henry Hub have seen the most price pressure recently.
At Transco Zone 3, cash prices surged in July 11 trading to settle at $11.79/MMBtu, or a more-than-$5 premium to Henry Hub. Similar prices at Transco Zone 4 pushed that location's basis premium to the mid-$4 range on July 11. At Florida Gas Zone 3 – among the most premium Gulf Coast hub locations – the cash market has consistently traded in the $9-12 range over the past week, Platts data shows.
With strong seasonal gas demand likely to continue across the Gulf Coast in August and September, forward gas markets are already pricing-in steep premiums over the balance of summer.
At both Transco Zone 3 and Zone 4, basis premiums are currently priced in the upper-$3/MMBtu range for August and at close to $2 for September. At Florida Gas Zone 3, forward premiums are now trading around the mid-$4 range for August and just over $3 for September, Platts M2MS data shows.
With strong cash premiums expected to endure through late summer, refilling South Central storage this season could prove a challenging task. According to a regional cell forecasts from Platts Analytics, Texas is expected to end the injection season with some 90 Bcf less in storage this year, compared to last. In the Southeast, the October-ending deficit to 2021 is expected top 160 Bcf.