Runaway Train - The Supply-Demand Fundamentals Spurring $6-Plus Natural Gas Prices

Prompt CME/NYMEX Henry Hub natural gas futures prices averaged $4.54/MMBtu this winter, up 67% from $2.73/MMBtu in the winter of 2020-21 and the highest since the winter of 2009-10. Prices have barreled even higher in recent days, despite the onset of the lower-demand shoulder season, with the May contract hitting $6.643/MMBtu on Monday, the highest since November 2008 and up more than $1 from where the April futures contract expired a couple of weeks ago. Europe’s push to reduce reliance on Russian natural gas has turned the spotlight on U.S. LNG exports and their role in driving up domestic natural gas prices. However, a closer look at the Lower 48 supply-demand balance this winter vs. last suggests that near-record domestic demand, along with tepid production growth, also played a significant role in drawing down the storage inventory and tightening the balance. Today’s RBN blog breaks down the gas supply-demand factors that shaped the withdrawal season and contributed to the current price environment.

When we looked at the gas market balance last September in High Voltage, we noted that the $5-plus prices at the time were potentially just the tip of the iceberg, and that given the precarious storage situation — the deficit had expanded to about 600 Bcf, from a 500 Bcf surplus a year earlier — and lethargic production, the market was primed for bullish price action during the winter of 2021-22. Now with winter in the rearview mirror, we can say that the worst-case scenario of another deep freeze like 2021’s Winter Storm Uri didn’t transpire. Nevertheless, demand growth outpaced supply, leading to overall tighter balances. And the year-on-year storage deficit that first emerged during Uri persisted through the winter, leaving storage with the lowest winter carryout in three years and shoulder-season prices above $6/MMBtu. How did we get here? Well, in some respects, the current market was more than a year in the making. Next, we dive into gas supply-demand data to understand the primary drivers and what they mean for the injection season ahead.

A good way to assess what’s driving the tightness (or looseness) of the gas market is to compare current fundamentals with the previous year. We do that by using the historical supply-demand data behind our daily RBN NATGAS Billboard report. Figure 1 shows the average winter-on-winter changes for each of the supply-and-demand components, comparing November 2021 through March 2022 to the same period the previous winter. The navy-blue bars indicate a winter-on-winter increase, while the red bars indicate a decline.

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