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Commodities 2021: Henry Hub cash volatility to run into 2021 on sustained production weakness

Highlights

Daily cash-price volatility near multiyear high in Dec

Daily contract volume surges to average 444 in Oct

Production supply-risk compounded by deliverability

New York — Elevated price volatility and trade volume at the US benchmark Henry Hub this autumn will likely continue into 2021 as domestic production weakness keeps the market off balance.

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In December, daily changes in the Henry Hub settlement price – calculated in absolute value – are elevated compared to recent history. While at least some of that volatility can be attributed to a single-day 60-cent surge in cash prices at the start of this month, wide fluctuations in heating demand and lower production levels have exacerbated daily price swings recently.

For a cash-market index that has seen minimal volatility in recent years, the trend during this fourth quarter has been notable.

In September and October, when the uptick in market volatility began, daily changes in the Henry Hub cash settlement averaged 12 cents and 13 cents/MMBtu, respectively. In the 17 months prior to that, though, daily price changes at Henry Hub ranged from a monthly average low of 2.3 cents to a high of just 6.1 cents.

While price volatility has moderated a bit this month, it still ranks among the highest recorded levels since January 2018, when extreme cold weather and strong heating demand moved the Henry Hub daily price index an average of 41 cents each day.

Volume, supply, demand

The recent increase in Henry Hub daily price volatility has correlated with an uptick in trading volume as well.

In October, daily contract volume averaged over 400 with as many as 810 contracts changing hands during a single day that month, S&P Global Platts data shows. The uptick in contract volume likely comes as traders, agnostic to price, look to profit on the volatility, and as producers and end-users maneuver around existing price positions and hedges.

The concurrent surge in both volatility and volume has accompanied large daily fluctuations in both supply and demand since late August.

Well into autumn, a flurry of hurricanes and tropical storms in the Gulf of Mexico took a significant volume of offshore gas production offline and simultaneously disrupted LNG feedgas demand. In the three months from August to October, offshore production briefly fell below 500 MMcf/d on three occasions as many producers shuttered platforms in the Gulf of Mexico. During that 90-day period, output from the offshore averaged only 1.7 Bcf/d – down about 1.1 Bcf/d, or about 40%, from its January-to-July average, data compiled by S&P Global Platts Analytics shows.

Fluctuations in Appalachian Basin gas production, which have become increasingly frequent this autumn, have also affected the US bottom-line production figure by as much as 4 Bcf/d recently, Platts Analytics data shows.

Outlook

Following steep cuts in capital spending and drilling activity this year, domestic production weakness appears likely to persist into the winter months, leaving the daily market tightly balanced.

While US storage volumes – last estimated by the US Energy Information Administration at 3.848 Tcf – remain 260 Bcf above the five-year average, capacity limits on single-day withdrawals could create deliverability risks on peak-demand days this winter. Those risks could be particularly elevated from mid-December through February, when US temperatures are often at their coldest.

In recent weeks, the growing storage overhang has weighed on bullish sentiment in the forward gas market – potentially dampening volatility by later this winter. In mid-December, Henry Hub calendar-month contracts for the peak-demand months of January, February and March remained in the $2.60s/MMBtu, down nearly 80 cents from annual highs in late October, S&P Global Platts M2MS data shows.