NYMEX Henry Hub May stays near 13-year highs due to supply issues

Strong points

NYMEX Henry Hub May settled at $6.28/MMBtu on April 8

April 7 was the highest price in the fast month since December 2008

Growing storage deficit, strong LNG exports possible drivers

After settling at its highest price in more than a decade on April 7, the NYMEX Henry Hub fast-month contract largely held onto its gains in April 8 trading as a growing storage shortfall and strength natural gas exports have raised supply concerns.

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NYMEX Henry Hub May settled at $6.278/MMBtu on April 8, just 8.1 cents lower than its previous day’s settlement of $6.359/MMBtu on April 7, according to preliminary settlement data from CME Group. According to data from S&P Global Commodity Insights, the April 7 daily settlement was the highest the fast-month contract had reached since December 2, 2008.

Even with the April 8 drop, the May contract has gained more than 70 cents since becoming the first-month contract.


Late-spring price spikes are not uncommon for natural gas futures, though few are as extreme as the recent price spike, experts said.

Traders anticipate the summer months at this time of year because “all the risk to your outlook is up front, where you don’t know how hot it will be,” market analyst Daniel Myers senior at Gelber & Associates, said in a phone interview.

Stephen Schork, director of The Schork Report, had a similar view, saying that “natural gas is a very counter-intuitive market, [futures prices] tend to rise before summer or winter in the off-season months.”

Supply concerns are likely fueling the typical shoulder season price rise, with U.S. gas inventories lagging the five-year average at a time when European energy security concerns have put pressure extra on US exports.

This concern is reflected further on the NYMEX Henry Hub futures curve, with every contract through March 2023 settling above $6/MMBtu during April 8 trading. Just a week earlier in April 1 trading, only two contracts – December 2022 and January 2023 – settled above $6/MMBtu.

The 2022-2023 winter band (November – March) spiked, averaging $6.47/MMBtu on April 8. That’s nearly 60 cents from $5.90/MMBtu on April 1.

Supply issues

The state of storage in the United States, which recently widened the deficit to its five-year average, is a source of concern for supply as the summer and winter demand seasons approach.

In its latest weekly gas storage report, the US Energy Information Administration observed a net withdrawal of 33 billion cubic feet from Lower 48 storage, bringing total levels to 1.382 billion cubic feet. Storage is currently 22.4% lower than the same week a year ago and 17.1% lower than the five-year average.

“We’re running out of near-term supply and there’s not really a supply or demand side response to deal with the acute supply crisis,” Myers said. “Drilling has resumed and production is underway, but it’s not obvious to the market in the immediate future.”

Gas production in the United States averaged 93.5 billion cubic feet per day in April, down about 300 million cubic feet per day from March levels, according to data from S&P Global. Volumes continued to lag near record highs set in December, when US gas production averaged 95.7 Bcf/d.


On the demand side, limited fuel switching options and record gas exports have also increased pressure on supply.

“A typical market response in recent years [to high gas prices] would be that power generators have an incentive to burn more coal than gas,” Myers said. “It’s the case now that the answer just isn’t there, both because so much of the coal capacity has been retired over the past few years and because coal prices themselves are under pressure and increasing.”

U.S. LNG exports are on track for a record year, averaging 12.55 Bcf/d year-to-date, compared to 10.33 Bcf/d at the same time a year ago . Global demand for US LNG cargoes is strong as European countries seek alternatives to Russian gas in response to Russia’s continued invasion of Ukraine.

Outlook

From a technical standpoint, the short-term market reaction will indicate where prices could move from here, David Thompson, executive vice president at brokerage Powerhouse, said in an interview.

“It will be interesting to see if we can get through this,” Thompson said. Staying near the top of the market highs “would open up new technical ground to explore, but we also have the technical conditions for a big sell off.”

The $6.10-$6.30 range has always been an insurmountable resistance point for other gas futures rallies over the past decade, with a late October 2021 surge peaking at $6.202/MMBtu and a rise skyrocketed in February 2014 to $6.149/MMBtu. Even the January price surge seen earlier this year, which market watchers dubbed a “classic short squeeze,” came in at $6.265/MMBtu.

“We are technically overbought on momentum indicators to a significant extent – ​​this does not necessarily signal a big price crash. We were also overbought in October, and we cut sideways before finally selling in December,” Thompson said.

Myers echoed a similar sentiment, saying, “I think things will calm down when the real summer demand comes through.”

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