Analysis: Record demand from power lifts Henry Hub gas as shoulder-season slump looms

Denver — Record gas-fired power burn levels this month are helping to lift US gas prices out of the doldrums, but cooler autumn temperatures ahead could see prices soon revisiting multiyear lows.

In August, gas demand for electric generation has averaged 41.4 Bcf/d, its highest monthly average on record by a margin of 1.2 Bcf/d, data compiled by S&P Global Platts Analytics shows.

A sizeable chunk of this month's gain is attributable to Texas where a heat wave earlier this month helped to lift power burn demand by over 900 MMcf/d compared to last August.

Year-on-year gains of 790 MMcf/d in the Southeast, 780 MMcf/d in the Northeast and about 570 MMcf/d in the Midwest also have contributed to this month's record demand figure.

The uptick in power burn has supported benchmark US gas prices in a market otherwise well supplied by strong production and a recent drop in LNG and pipeline exports.

Over the past two weeks, Henry Hub gas prices have climbed into the low $2.20s/MMBtu, up from a nearly three-year low at just $2.02/MMBtu in early August, S&P Global Platts data shows.

On Tuesday, cash prices at the Henry Hub were up about 6 cents in afternoon trading to a preliminary settlement price at $2.265/MMBtu -- the highest level since late July.

DEMAND, PRODUCTION

Moving into September, a seasonal shift to autumn should see power burn demand fall sharply. According to Platts Analytics, weather-normal demand in September would average 33.7 Bcf/d or about 7.7 Bcf/d less than the August-to-date average.

Flagging shoulder-season demand next month, though, is likely to meet with continued gains in US gas production, putting additional pressure on prices.

On Monday, US Lower 48 dry gas production climbed to a fresh record high at 91.3 Bcf/d, marking the eighth record high already this month. Through Tuesday, US output has averaged nearly 90.3 Bcf/d in August -- up about 3.9 Bcf/d or 4.5% compared to the January 2019 average, Platts Analytics data shows.

EXPORTS

In a potentially bullish development for the US market, Mexican President Andres Manuel Lopez Obrador on Monday offered some hope for an imminent startup to service on the 2.6 Bcf/d Sur de Texas-Tuxpan export pipeline, which has remained offline since its completion in late June.

In a public briefing, the head of state said that contract disputes between state-owned power generator CFE and private natural gas pipeline operators could be resolved by later this week.

Startup of the Sur de Texas export project could quickly relieve the US market of as much as 1.5 Bcf/d.

Just as contracted export volumes begin moving out of the Texas market, a maintenance-and-commissioning-related decline in LNG feedgas demand could be nearing its end.

On Tuesday, feedgas demand was estimated at 5.8 Bcf/d or its highest since late July. In August, US liquefaction terminals have only consumed about 4.4 Bcf/d, which compares to an average 6 Bcf/d in July.

FORWARDS

On Monday, the Henry Hub rolling 12-month forward curve was assessed at an average $2.34/MMBtu, which is up just marginally from a recent low at $2.28/MMBtu, Platts M2MS data shows.

Through the shoulder season months of September and October, prices are nearly flat, ranging from just $2.21/MMBtu to $2.23/MMBtu.

Assuming domestic or export demand underperforms in the weeks ahead, and especially before the arrival of heating season, it seems plausible that cash prices could quickly return to the recent $2/MMBtu level, or potentially even lower.

-- J. Robinson, jrobinson@spglobal.com

-- Edited by Rocco Canonica, newsdesk@spglobal.com