Spot natural gas prices at the Henry Hub have surged in June on hot weather, an increase in demand for US exports and low regional inventories, a sign that the US gas market is emerging from the 2020 downturn.
The Henry Hub index in the month ended 24 June averaged $3.14/mmBtu, up by 9pc from the average price in May and nearly double the year-earlier price of $1.58/mmBtu. Spot prices at the US benchmark so far this month are running about 5pc higher than the bid week index, indicating that spot prices so far this month were exceeding expectations in the month-ahead market for June.
The Henry Hub in Erath, Louisiana, is the delivery point for gas traded in the Nymex futures market. Nymex prompt-month gas prices on 24 June rose to a more than two-year settlement high of $3.418/mmBtu on forecasts for above-normal temperatures in late June and early July and a US government report showing another smaller-than-average draw from gas storage, the second in as many weeks.
The sharp increase in gas prices underscore a rebound in demand for the heating and power plant fuel following the economic downturn triggered by the Covid-19 pandemic. Sluggish economic activity last year pared exports, while robust gas production and a mild 2019-20 winter left the market flush with supply. Prompt-month prices tumbled below $2/mmBtu in January 2020 and remained there through the first half of last year.
US gas prices may still face some headwinds during the summer. The rebound in gas prices has spurred an increase in gas drilling and gas demand from the US power sector may cause more electric utilities to dispatch coal-fired power to meet incremental increases in demand. The US Energy Information Administration (EIA) has projected a modest 0.9pc increase in gas production this year, following last year's 1.8pc decline. Gas use for US power generation was forecast to decline by this year by 7.4pc, or 2.4 Bcf/d (68mn m³/d).
Gas demand for power generation so far this this year has remained resilient, despite the increase in prices, and could support further price gains, according to analysts with Tudor Pickering Holt. Gas demand during the second quarter of this year has averaged 28.2 Bcf/d, or about 700mn cf/d more than the analysts had forecast. The analysts are projecting an average summer price of about $3.25/mmBtu, but they noted higher-than-expected demand could lift prices above that level.
Prices have also garnered support from two consecutive smaller-than-average injections into gas storage. US gas inventories in the two weeks ended 18 June have increased by just 71 Bcf, well below the five-year average injection of 170 Bcf. The recent injections were skewed lower by the reclassification of 51 Bcf of working gas inventories, or gas that is cycled in and out of storage to base gas, or the gas that is used to operate storage sites. Even without that reclassification, injections would have lagged average levels by 28pc.
The EIA's inventory reports provide the US gas market's best weekly indicator of the balance between supply and demand.
The market has tightened this year as US exports increased. Scheduled deliveries to US LNG export plants in the week ended 24 June averaged 9.2 Bcf/d, up by 500mn cf/d, from a week earlier. Deliveries in the past week were well above the 3.8 Bcf/d delivered during the same week last year, when the Covid-19 pandemic cut deeply into gas demand from overseas markets.
