US Gas Prices Struggle as Storage Builds
A triple digit build in US natural gas storage, announced by the Energy Information Administration June 25, has pushed the prompt month CME Nymex contract at Henry Hub into territory never seen before for June trading, consultancy RBN Energy said June 26.
In the week ended June 19, the EIA reported, an estimated 120bn ft3 of natural gas was sent to storage. That put stocks at more than 3 trillion ft3, up from 2.9 trillion ft3 the week before, nearly 740bn ft3 higher than last year and 466bn ft3 higher than the five-year average.
Futures trading on the CME exchange, for July contracts, reacted almost immediately, falling 7% on the day to settle at $1.482/mn Btu, a record low for June trading, RBN said in its daily blog post, while the entire CME Henry Hub futures curve shifted lower over the previous week. The July contract expires at the end of trading June 26.
RBN suggested that the price collapse at Henry Hub in the last few weeks – June gas was trading as high as $1.80/mn Btu two weeks ago – is reflective “of bigger problems” facing the natural gas market: gas production is down about 10bn ft3/day in the US, but total gas demand, including LNG exports, has been “exceptionally” weak as well.
“As a result, by mid-July, the storage inventory appears likely to reach record highs for that time of year – record highs that may well persist through the end of injection season in early November unless there is a substantial correction in the gas supply-demand balance,” blog author Sheetal Nasta wrote. “Moreover, it’s looking less and less likely that relief will come from the demand side.”
Projecting five-year average net injection rates forward through the rest of the injection season, which ends October 31, suggests storage inventory will reach a record peak of 4.23 trillion ft3 in the first week of November – “perilously close” to the EIA’s estimate of demonstrated peak working gas capacity of 4.26 trillion ft3.
The price collapse, RGN said, is a clear signal that some sort of correction is needed in the supply-demand balance to “stave off” storage constraints this fall. In the recent past, low prices incented a switch to gas from coal for power generators, boosting the power burn enough to correct the imbalance, while increased pipeline exports to Mexico and growing LNG exports have also helped.
“The problem this time around, though, is that both of those levers lack the torque that they had in past years,” Nasta writes. “The surge in gas production over the past decade has priced out coal-fired power generation, in many cases permanently.”
And with Covid-19 wreaking havoc on global gas markets, the industry can no longer look to LNG to save the day: feed gas demand is running below year-ago levels, despite additional liquefaction capacity, and cargoes are being canceled. Those market dynamics, Nasta writes, are expected to persist at least through the current injection season.
“That leaves the supply side, namely production, as the biggest (non-weather) lever for balancing the market, at least until LNG exports recover – possibly by winter when domestic and European heating picks up,” he concludes. “Suffice it to say, the gas market is in for a stomach-churning injection season that likely will involve further production cuts, or else relinquishing control of the natural gas equilibrium to those two uncontrollable forces: weather and time.”