Summertime Blues - An Update of Demand Factors Affecting the Gas Market Balance

Ahead of Hurricane Harvey, the CME/NYMEX Henry Hub September natural gas futures contract this past Friday settled at $2.892/MMBtu, down 5.7 cents on the day, as the market awaited the impact of the storm. Since then, preliminary gas pipeline flow data show major shifts in supply and demand (more on that in the blog). As of Sunday evening, the September contract was complacent, up little more than a penny in after-hours trading. We’ll know more about the effects of Harvey and the market’s reaction today and in the coming days and weeks. But prior to Harvey, the gas market has been sluggish in recent months. Last Friday’s settlement is down 34 cents from the summer peak expiration settlement in June of $3.236. The U.S. natural gas inventory deficit to last year has come down from more than 400 Bcf at the start of injection season in April to about 220 Bcf as of the latest storage data. What’s behind the higher injections and lower prices up to this point? Today, we continue our analysis of the gas market balance, including the latest on Harvey.

Before we delve into today’s blog, our Houston-based RBN team and all of our folks throughout the country wish to express our heartfelt condolences for the victims of Hurricane Harvey and its aftermath. 

This is Part 2 of our update on the natural gas market balance in the injection season so far (from April 1 through August 15), using daily supply and demand data from our NATGAS Billboard report (RBN’s joint report with IAF Advisors). We began in Part 1 of this series with a fresh look at the relative strength of the gas market compared to last year, starting with the supply side. We’ll continue that analysis with a discussion of the demand side of the seasonal balance in a bit. But first, it’s worth taking note of the shifts in the daily supply and demand resulting from Harvey-related disruptions. The data is likely to be revised significantly today and in the coming days, but preliminary data from our friends at PointLogic Energy showed gas production volumes in Texas as of Sunday evening were down about 0.8 Bcf/d (5%) to 15.7 Bcf/d, from the 30-day average of about 16.6 Bcf/d, with the declines almost entirely from the South Texas region. At least another 0.9 Bcf/d was shut-in from offshore platforms in the Gulf of Mexico. Overall U.S. production as of Sunday was down 1.9 Bcf/d (~3%) from the 30-day average, again based on very preliminary numbers.

NATGAS Permian Report

The NATGAS Permian Report is a weekly natural gas fundamentals analysis focusing entirely on the key market drivers within the Permian basin. The report contains details and forecasts around natural gas production, demand, and pricing. It offers a summary of pipeline outflows and capacities from the Permian to neighboring regions, outlining the key shifts in flows to the West, MidCon, and Texas intrastate markets.

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The effect on demand was even more severe as temperatures fell well below normal across the state. U.S. consumption fell by more than 4.0 Bcf/d, or ~7%, led by a 3.5-Bcf/d (11%) drop in power burn. And, finally, exports to Mexico fell by about 0.3 Bcf/d (6%) from its 30-day average. Two major export pipelines — Kinder Morgan’s Tennessee Gas Pipeline (TGP) and Natural Gas Pipeline Co. of America (NGPL) had declared force majeure events ahead of the storm. The bigger drop in demand than supply effectively means that storage injections during this week could be larger than previously anticipated. But as the storm dissipates over the next week, if supply is slower to bounce back than demand, the market could tighten again for some time until the supply also normalizes. We’ll continue to watch these developments, including how they will impact the season-ending storage inventory.

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