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NYMEX Henry Hub gas nears $6 on supply concerns, lingering Ida impact

Highlights

NYMEX October rolls off board at $5.841/MMBtu

Bullish sign for winter outlook: analysts

The NYMEX Henry Hub prompt-month natural gas contract continued a four-day rally Sept. 28, nearing heights last seen in February 2014, as a slow restart to Gulf of Mexico gas production following Hurricane Ida compounds supply tightness in global gas markets.

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NYMEX October tested the waters beyond $6/MMBtu on its last day of trading prior to expiration, with intraday highs reaching $6.28/MMBtu. Ultimately, the contract settled at $5.841/MMBtu, up 13.50 cents from the prior day's settlement, according to preliminary CME Group settlement data.

The futures price rally also extended into the physical Southeast gas market.

The Henry Hub cash price soared to $5.93/MMBtu while demand hub Transcontinental Gas Pipe Line Zone 4 rose to trade at $5.945/MMBtu for next-day flows Sept. 28, nearing a new high of $6/MMBtu for the first time since the February freeze, according to preliminary Platts settlement data.

Henry Hub spot netted a 90-cent increase over the past two trading days, while Transco Zone 4 rose $1.04.

Supply concerns

With US gas demand in the shoulder season doldrums, market analysts pointed to supply concerns in the US and globally as driving the increase.

"It is impossible to hide that we are undersupplied in this market," Price Futures Group senior market analyst Phil Flynn said in a telephone interview.

Lagging storage levels, feverish global LNG demand, and the lingering impact of Hurricane Ida on Gulf Coast gas production are major factors, Flynn said, in addition to what he sees as underinvestment in fossil fuel production.

Despite the lure of higher prices, US gas producers have maintained their commitment to capital discipline; instead, many have chosen to focus on maximizing returns and reducing debt while holding production volumes steady.

"Some of this underinvestment is by design, and some of it is that increasing production is not the same as flipping a light switch," Elaine Levine, president of Washington-based brokerage Powerhouse TL, told Platts in an interview.

"There are lag times. Especially with the constraints in labor and equipment and transportation, it adds to the backlog. We still don't have, historically speaking, the rigs working that you think $75[/b] crude and $6[/MMBtu] gas would command," Levine said.

Gulf of Mexico gas production

Ida, which made landfall near New Orleans Aug. 29 as a Category 4 hurricane, slashed offshore Gulf of Mexico gas production.

More than 90% of offshore production in the Gulf was shut-in in the immediate aftermath of the hurricane, S&P Global Platts Analytics data showed.

Offshore production continues to trail pre-storm levels. Platts Analytics data shows that offshore production averaged 2.1 Bcf/d Sept. 21-28, down about 600 MMcf/d from pre-storm levels.

Efforts to repair damage from the storm were slowed by widespread electricity outages and the Nicholas, which made landfall in Texas in mid-September as a Category 1 hurricane.

The extended period of lower offshore production exacerbated concerns over storage levels going into the winter months.

Global supply tightness

Supply concerns have not been limited to the US, with gas demand also surging in Asia, South America, and Europe. Global gas prices reacted accordingly, especially as competition for LNG cargoes heats up.

The European gas benchmark Dutch TTF reached Eur75.675/MWh, or $25.94/MMBtu, for next-day flows in its most recent trading session Sept. 27, Platts pricing data shows. Similarly, the Platts Japan-Korea Marker for second-half October delivery settled at $32.23/MMBtu Sept. 28.

Strong global gas demand paints a bullish picture for US LNG exports going into the winter, with Platts Analytics expecting US export facilities to be fully utilized at 12.2 Bcf/d.

Winter outlook

The current US gas price rally is, at its core, about upcoming winter demand.

Storage levels in the Lower-48 storage states have remained at a deficit to the five-year average since last winter, according to US Energy Information Administration data, with the market making little headway toward closing the gap as it progressed through injection season.

The lower storage levels have increased the exposure of both physical and futures pricing to potential demand spikes, particularly if sustained cold weather is in the cards and export demand remains robust.

With the impact on storage and the lag in production after Hurricane Ida, "even a normal winter could put us [at the] risk of [a] price spike," Flynn said.