Northeast Gas Demand Springs Upward at Start of Spring

Before the bullish winter of 2021-22, it appeared the Northeast natural gas market was headed for familiar territory: worsening seasonal takeaway constraints and deeper, constraint-driven price discounts starting as early as this spring. Instead, the market went in the other direction the past few months. Takeaway utilization out of Appalachia has been lower year-on-year and, for the most part, Appalachian supply basin prices have followed Henry Hub higher even as that benchmark rocketed to 14-year highs. That’s not to say that constraints out of the Northeast aren’t on the horizon. But the market is now poised to escape the worst of it this year, despite the completion of the last major takeaway pipeline project in the region, Mountain Valley Pipeline (MVP), being pushed out another year or longer, if it crosses the finish line at all. In today’s RBN blog, we provide an update on regional fundamentals and what recent trends mean for gas production growth and pricing in the region.

Natural gas storage activity this spring suggested extremely bearish fundamentals. The market injected gas into storage at a record pace, well above year-ago and 5-year-average levels. The high injection rate was in part a result of demand loss as weather abruptly moderated in April and May. However, a look at injections on a weather-adjusted basis suggests there’s another dynamic at play — namely, that increased baseload demand for gas in the power sector amplified the effects of the mild weather this spring, lowering demand even more than temperatures alone would indicate. Moreover, that same dynamic could have an opposite, equally extreme effect during the hotter months when power generation is the primary driver of gas demand. Today, we look at the latest gas storage and demand trends, and what they can tell us about the balance of injection season.

The U.S. natural gas storage inventory lagged behind year-ago and five-year average levels throughout this past winter. The market started the withdrawal season in November 2017 with about 200 Bcf less in storage than the prior year. That year-on-year deficit subsequently ballooned to more than 600 Bcf. Compared to the five-year average, the inventory went from about 100 Bcf lower in November to a more than 300-Bcf deficit now, at the beginning of spring. An expanding deficit in storage is typically a bullish indicator for price. Yet, the CME/NYMEX Henry Hub natural gas futures contract struggled to hold onto the $3.00/MMBtu level it started the season with in mid-November, and, in fact, has retreated back to an average near $2.70 in the past couple of months — about 25 cents under where it traded a year ago. Today, we look at the supply-demand factors keeping a lid on the futures price.