NYMEX Henry Hub futures vacillate below $4 as bullish winter sentiment fades

Natural gas futures were roughly flat in Dec. 9 trading as the market took stock of recent changes in supply and demand that appear to foreshadow a less-than-record winter season ahead for prices.

During the morning session, the January 2022 futures contract seesawed around its prior closing price, trading in a wide range from the low-$3.70s to low-$3.90s/MMBtu. The contract settled almost unchanged at $3.814/MMBtu, data from CME Group and S&P Global Platts showed.

Over the past six weeks, shifting market sentiment has fueled a nearly 40% decline in the NYMEX prompt-month contract price from a more-than-seven-year high at over $6.30/MMBtu.

The steep drop in Henry Hub futures has coincided with credibly durable gains in gas production and storage levels, and a choppy, less-than-bullish start to the heating season.

Production, storage

In the runup to this winter, US gas production surged, setting a pandemic-era record and nearly two-year high in late November at over 95.4 Bcf/d, S&P Global Platts Analytics data shows.

Gains in Appalachia and Texas account for much of the recent growth, along with a slow but steady rebound in offshore production receipts that mostly accrued earlier this fall in the destructive wake of Hurricane Ida.

In the Marcellus, the startup of Transcontinental Gas Pipe Line's Leidy South expansion project this month has prompted a handful of producers, likely including capacity holders Coterra Energy and Seneca Resources, to dialup output to fill the new pipeline.

In Texas, the growth has come largely from the Permian and the Haynesville where production has approached or even surpassed previous record highs recently at over 14 Bcf/d in both basins. With their respective rig counts now just below pandemic-era highs, continued output growth from the Permian and the Haynesville looks increasingly likely heading into 2022.

Recent production gains have helped to fuel a stunning recovery in US gas storage levels.

After reaching a 235 Bcf deficit to the historical average in September, US inventories are now estimated at 3.505 Tcf, as of the week ended Dec. 3 – just 90 Bcf below the prior five-year average, data published Dec. 9 by the US Energy Information Administration showed.

Demand

The recently fortified US gas supply has so far been met by weak seasonal demand.

From Nov. 1 to date, US residential-commercial heating demand has averaged about 33.2 Bcf/d, underperforming the prior five-year average by 1 Bcf/d, or about 3%, Platts Analytics data shows.

Short-term forecasts show the trend continuing over at least the next week, with mild weather keeping US res-comm just below 34.5 Bcf/d – 10.7 Bcf/d, or almost 25%, below average.

Based on the National Weather Service's most recent eight- to 14-day outlook, the mild weather pattern is likely to continue with at least a 70% to 80% chance for above average temperatures along the entire Eastern Seaboard and across the Southeast. Most of the Midwest – also a critical region for heating demand – can expect a lower probability for mild temperatures ranging from 33% to 60%, a forecast issued Dec. 9 showed.

Longer term, the Weather Service's most recent seasonal outlook, issued in mid-November, predicted a similar mild-temperature pattern to prevail through what would be this winter's coldest months from December to February.

The rapidly shifting US supply and demand balance has weakened market sentiment well beyond the prompt month. At market settlement Dec. 9, the first-quarter 2021 futures contracts settled at an average $3.76/MMBtu. The full-year 2022 contracts meanwhile, ended trading less than a penny higher at an average of nearly $3.77/MMBtu, S&P Global Platts' data showed.