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Sizzling forecasts, persistent heat rekindle NYMEX Henry Hub gas futures rally

Highlights

Prompt-month tops $3.60, bal-21 averages $3.65/MMBtu

Heat waves, limited generating capacity lift gas-fired burns

Tight US supply-demand fundamentals spur market bulls

NYMEX Henry Hub natural gas futures on June 28 continued building on the previous week's rally as the prompt-month contract led the latest advance, rising to its highest since December 2018.

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In morning trading, the expiring July contact gained another 13 cents hitting a 30-month high at $3.63/MMBtu. Further out along the curve, the balance-2021 monthly gas contracts gained about 11 to 12 cents pricing up to an average $3.65/MMBtu through December, CME Group data showed.

Over the past week, Henry Hub futures and forwards prices have gained about 40 to 45 cents as population-weighted temperatures across much of the continental US push into the 80s Fahrenheit with evens 90s appearing in some locations, S&P Global Platts Analytics data shows.

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"The hot weather gave us the move upward to $3.40, $3.50 ... what happened is that some people went short," said John Woods, trader and president of brokerage JJ Woods Associates, said June 28. "It's an exaggerated rally because people have reversed their positions – the shorts got out [to] cover and reverse," he said by telephone.

Woods sees the market's expectation for intense heat over the next two months potentially pushing prices further towards the $4 level as the medium-term weather forecasts begin to materialize.

Heat waves, power burn

In the West, scorching temperatures – like those that visited the region in early June – and limited reserve-generating capacity are both major concerns for system reliability on the western grids this summer, according to California ISO President and CEO, Elliot Mainzer.

Mainzer's warning, made during a June 25 media briefing hosted by the United States Energy Association, came in the wake of a National Weather Service forecast predicting "unprecedented and dangerous heat" for the US Pacific Northwest. As predicted, on June 28, the region's population-weighted temperature hit 91 degrees F – its highest on record dating back to 2005, according to Platts Analytics data.

The scorching temperatures were met with a new single-day record for gas-fired power demand in the Northwest which surged to 1.72 Bcf/d on June 28. The move helped to propel total US power burn to 38.3 Bcf/d – within striking distance of the seasonal highs already recorded earlier this month.

In a recent month-ahead forecast, the Weather Service predicted a 40% to 60% probability for above-average temperatures next month across most the western Plains and the Rocky Mountains states along with the desert Southwest, California and the Pacific Northwest.

Under weather-normal conditions, Platts Analytics estimates power burn demand would average about 38.9 Bcf/d in July – down sharply from an average 44.3 Bcf/d in July 2020, thanks to higher gas prices and an anticipated uptick in gas-to-coal fuel switching. In June, though, US power burn has averaged a surprising 35.8 Bcf/d, outperforming the weather-normal forecast and trending roughly at par with year-ago levels, owing in part to hot temperatures, but also to a fuel-switching trend that has been more limited than previously expected.

Supply and demand

Flat domestic production, strong export demand and low storage levels have set a bullish backdrop for this summer's anticipated heatwaves.

In June, US production has averaged 91 Bcf/d – up more than 4 Bcf/d, or about 5%, from its year-ago level but still well below its pre-pandemic highs at over 96 Bcf/d in late 2019, Platts Analytics data shows.

Over the same 12-month period, gas demand has surged. Month to date, feedgas delivered to US LNG terminals has averaged just over 10 Bcf/d, up nearly 6 Bcf/d from June 2020. Exports to Mexico are also up sharply, rising to an average 6.8 Bcf/d this month from just 5.5 Bcf/d in the year-ago period.

Strong demand and limited supply growth this year has also widened this season's storage deficit. On June 24, the Energy Information Administration estimated US stocks at just 2.482 Tcf as of the week ended June 18 – 513 Bcf below its year-ago level and 154 Bcf below the five-year average. Since the start of June, this season's storage deficit has nearly tripled from just 55 Bcf, as limited domestic supply struggles to keep pace with the summer's unexpectedly strong demand.