The CME/NYMEX Henry Hub prompt contract settled at $1.482/MMBtu yesterday, down 11.5 cents (7%) from the previous day and the lowest settle that the market has ever seen during June trading. That’s also a 33-cent (18%) drop from just two weeks ago when prompt futures were around $1.80/MMBtu. The immediate rationale is the larger-than-expected and larger-than-normal storage build reported by the Energy Information Administration yesterday. But current price levels are also indicative of bigger problems looming for the gas market, namely that while gas production is down, total demand, including exports, has been exceptionally weak too. 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. Moreover, it’s looking less and less likely that relief will come from the demand side. Today, we look at the drivers behind the latest gas market meltdown and implications for the balance of injection season.
U.S. natural gas futures haven’t been on the same nausea-inducing roller coaster that oil prices have thus far in 2020, but it’s fair to say that the gas market is feeling its collective stomach drop right about now. As we explained a few days ago in That’s Schadenfreude!, gas prices already were weak, averaging about $1.80/MMBtu in 2020 to date, lower than the annual average has been in the past 25 years. As shown in Figure 1 (left graph), prompt futures started the year above $2/MMBtu but quickly tumbled to multi-decade lows by mid-January as wintry weather failed to materialize and it became clear that the year-on-year surplus in storage that had carried over from 2019 wasn’t going anywhere anytime soon (see Oops, Winter’s Out of Time and Flirtin’ with Disaster). Then came COVID-19 and market worries that business closures and social distancing measures would clip domestic consumption, sending front-month futures still lower through March. In reality, the impact to domestic gas consumption was offset by colder-than-normal weather through April, which ended up boosting residential/commercial use enough to whittle down the storage surplus somewhat and buoy prices again.
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