May 03 2022
US gas futures prices edged back toward the mid-$7/MMBtu range in May 2 trading as domestic supply remains constrained by sluggish production and an enduring inventory deficit. As US upstream activity continues to build, though, the now aging rally faces increasing downside risk later this summer.
In early trading, the June contract briefly edged up to $7.55/MMBtu while balance-of-summer futures traded into the mid-$7.60s/MMBtu. The market remained mostly in contango through next winter with January 2023 briefly pricing at nearly $7.90/MMBtu, data from CME Group showed.
At a time of year when US gas prices typically trough, the NYMEX bulls are steering the market, apparently spurred persisting supply concerns this spring.
In April, spring pipeline maintenances helped to keep US gas production sputtering around 93.2 Bcf/d. Following a steep New Year production decline in January, domestic output remains about 2 Bcf/d, or roughly 2%, below late-December levels, S&P Global Commodity Insights data shows.
Low storage levels have added to the market's concern. As of the week ended April 22, US inventories are estimated at 1.49 Tcf. In it's latest storage report, data from the US Energy Information Administration showed the inventory deficit at 305 Bcf – its widest yet this year. An updated forecast published by S&P Global shows cooler weather and elevated heating demand helping to widen the deficit over 330 Bcf by the first week of May.
After unseasonably cool weather last month, US temperatures are expected to trend closer to normal through mid-May, according to recent forecasts from the National Weather Service and S&P Global.
Heating demand should average about 18 Bcf/d over the next week, undershooting the prior five-year average by about 250 MMcf/d. Gas demand from generators, meanwhile, is expected to average about 26.4 Bcf/d, setting a record high for the seven-day period thanks partly to the continued retirement of coal-fired generating capacity and the recent coal-to-gas fuel switching in the power markets.
Based on the Weather Service's seasonal forecast for June, July and August, the outlook for gas-fired electric this summer looks more bullish. Nearly the entire Lower 48 states face an elevated probability for hotter-than-normal temperatures more concentrated risks across the Rocky Mountain and desert West and along the Northeastern Atlantic seaboard.
While the NYMEX gas futures market has good cause for bullishness this spring, steadily brewing upstream activity over the past several months could put a damper on the rally.
In the week ended April 27, the US drilling rig count edged up to 799, reaching its highest since March 2020, data published by Enverus shows. Other indicators of upstream activity are also looking increasingly bullish. According to the EIA's April Drilling Productivity Report, drilling and well completions are edging back toward, or already above, pre-pandemic levels in Appalachia, the Haynesville, the Bakken, the Eagle Ford and the Permian.
Based on recent activity, S&P Global has forecast US production to rebound this summer, potentially surpassing 96 Bcf/d by late August to early September.