I've pulled some strings, called in a favour, and got my good friend Andrea to give us a writeup on Nat Gas

Henry Hub gas: what about the Summer?

Henry Hub natural gas prices are currently trading up 18 cents with the most traded June ’22 contract (M) at $7.80. The entire forward curve was strongly up, with two different trends to stress (see the graph below): (1) the strong backwardation we have, if we consider all the Cal’22 (calendar’22) compared to the Cal’23. Indeed, right now December ’22 trades over $8, while April’ 23 trades at $4.76, with a huge ‘widow maker premium’ (March’23/April’23 spread of around $2; (2) the backwardation we have within the Cal’22, with July’22 (N) currently trading over October.

In the Henry Hub market, we have not seen those conditions for more than 15 years and we need to come back to the pre shale-era environment. Different factors have contributing to those high prices (both flat prices and the entire forward curve). The first one is related to the LNG exports. This year we will reach almost 14 bcf/d export, even if right now we are around 12 bcf/d due to the classic spring maintenance, and this is around 1/7 of overall Supply. This is pretty important considering the strong demand we have not only from Europe, but also from East Asia. Right now the spread TTF-JKM favors the former rather than the latter. The second point is related to power burns. During the last 10 years, we’ve been in habit to lose a lot of natural gas demand for switch to coal, at different Henry Hub price level (in my model, I had demand losses at $4, 4.50, 5). This year the situation is different: when we also touched $9, we had almost no gas to coal switching, and, even in this weekend, we’ve been pretty tight (see Ercot), even with wind and all the renewables. The lack of coal really contributes to this market tightening, even in this shoulder season period. Then supply. Even if we had some US lower 48 production recovery over the last couple weeks, we are again around 3 bcf below year to date highs. These production levels are not enough in order to get a decent amount of gas injected into the ground by November (see next EIA chart).

Right now, we are at 1643 bcf working gas in underground storage, according to EIA, compared to 2019 bcf last year for the same period and 1955 bcf if we consider the five year average. Even if we need to take with a grain of salt the five year average, we are not injecting gas in the ground, and, right now, with a potential injection next Thursday in the low 80ish bcf according to my model, I project a End of Season level around 3270 bcf. I do think that the market would be comfortable around 3650 bcf. Then, finally, weather. Those who think that weather has been the important factor are partially right, Indeed, they forgot how warm was December, then the overall winter was not so impressive HDDs wise. It's correct, though, that we suddenly switched from Hdds to Cdds and, particularly in Texas, this is important to consider, since the classic summer demand. However, as you can see from the map below, May23-30 period is not exactly impressive, barring again, some warm in the South. Indeed, during the weekend, we just picked up some Hdds in the north, however prices…… and finally, what about the summer? If we have some hot?

Andrea Paltrinieri
Associate Professor of Banking and Finance
Natgasweather and Energy Working analyst