ANALYSIS: Henry Hub winter gas price sink as mild weather zaps residential-commercial demand

Winter gas prices at the US benchmark Henry Hub are down sharply over the past week as mild weather and buoyant production threaten to keep the market well supplied into the colder months.

On Nov. 9, calendar-month contracts for December, January and February settled at $2.86, $3.00 and $2.97/MMBtu, respectively, down about 45 to 50 cents from annual highs in late October, S&P Global Platts' most recently published M2MS data shows.

The selloff this month has mirrored recent downward movement in the cash market.

In Nov. 10 trading, spot prices at the Henry Hub were up about 12 cents to $2.71, but remain sharply lower compared to late October when the index traded at over $3/MMBtu.

Weather, heating

Lower gas prices come as mild weather blankets key heating-demand markets in the Northeast and the Midwest, halting a late-October runup in residential-commercial gas demand.

In both the Northeast and the Midwest, population-weighted temperatures have averaged a balmy 55 degrees Fahrenheit this month. In the Northeast, that's about 10 degrees above the region's full-month average for November over the past five years. In the Midwest, its 15 degrees above the average.

The impact on heating demand has been notable. At the US level, homes and businesses consumed an average 23 Bcf/d this month, down from levels over 30 Bcf/d in late October. Compared to the five-year average for November, heating demand is off nearly 9 Bcf/d, data compiled by S&P Global Platts Analytics shows.

Storage

Milder weather this month is also a key factor behind a forecast resurgence in storage injection demand.

After a first withdrawal of the winter-heating season reported by the US Energy Information Administration for the week ending Oct. 30, analysts now predict a net flip back to injections for the Nov. 13 reporting week.

As of Oct. 30, US gas in storage is estimated at 3.919 Tcf – a roughly 200 Bcf surplus to both the five-year average and year-ago levels, EIA data shows.

According to Platts Analytics, the EIA should report just a 4 Bcf withdrawal for the week ending Nov. 6, followed by 31 Bcf injection during the week currently in progress. By mid-November, the return to injection activity could lift the US storage surplus to over 220 Bcf, EIA data shows.

Production

Buoyant production in November is yet another factor that likely has the forward markets concerned.

Month to date, gas production has averaged 88.3 Bcf/d – up about 1.3 Bcf/d compared with the October average, Platts Analytics data shows. Much of this recent gain has accrued from offshore fields where output has rebounded to 2 Bcf/d this month, up an average 500 MMcf/d from October when a series of hurricanes and tropical storms in the Gulf of Mexico temporarily disrupted operations.

An even larger gain of nearly 750 Bcf/d has come in November from outside the major US shale basins – a category classified by Platts Analytics as "Other US production."

The change could reflect a move by operators to restore output at marginal or curtailed wells as US gas prices rise from record lows this past summer.