Denver—As the Midcontinent and South Central US continue to thaw from this week's extreme winter weather, a massive drawdown in gas storage has spurred a rally in the forwards markets as traders prepare for stronger summer injection demand and tighter market balances in 2021.
In Oklahoma City, high temperatures were forecast to rise just above freezing Feb. 19 and continue warming into the 50s Fahrenheit over the weekend. In hard-hit Midland of West Texas, even milder temperatures in the 40s to upper 50s F were expected through the upcoming weekend.Cash markets in both locations responded with further easing Feb. 19 with prices at NGPL Midcontinent falling to $4.04/MMBtu and Waha dropping to $4.27/MMBtu, Intercontinental Exchange data showed.
After trading at record levels in the hundreds, and at some locations even into the thousands, this week's surge in gas prices across the central US has prompted a steep drawdown in inventory levels that could have an enduring impact on regional balances and the broader US gas market.
StorageFor the week ended Feb. 19, total US inventory levels are projected to have declined by 347 Bcf, according to an updated forecast from S&P Global Platts Analytics. The drawdown, led by the Midwest and South Central regions, would be the largest since January 2018 and, potentially, the second-largest withdrawal on record, according to data from the US Energy Information Administration.
Over the next two weeks, milder temperatures across much of the continental US are expected to significantly reduce the market's reliance on storage, with drawdowns for the weeks ending Feb. 25 and March 4 currently projected at 194 Bcf and 96 Bcf, respectively.
By early March, though, the combined withdrawals should see US inventory levels fall sharply below the prior five-year average, hitting about 1.64 Tcf. Assuming average drawdowns over the balance of this winter's withdrawal season, total US stocks would bottom out around 1.5 Tcf in early April.
Forward pricesWith significantly more injection demand likely in store for the upcoming summer season, both regional and benchmark US forwards markets are now betting on higher 2021 gas prices.
At NGPL Midcontinent, the balance-2021 curve settled Feb. 18 at $2.93, up about 9% compared with an average forward price of $2.70/MMBtu on Feb. 1. In West Texas, the bal-21 curve at Waha has made even larger gains, settling most recently at $3.04–up more than 12% from an average $2.71/MMBtu at the start of February, S&P Global Platts' M2MS data shows.
At the Henry Hub, the 2021 forward curve surged to a multiyear high at nearly $3.40 earlier this week, before settling sharply lower Feb. 18 at $3.11/MMBtu–still a nearly 20 cent gain since Feb. 1.
ProductionThe recent, and potentially persistent, decline in US gas production this week is another factor that could lend renewed momentum to the forward market rally.
On Feb. 19, US gas production was estimated at 76.2 Bcf/d–still 16%, or nearly 15 Bcf, below its prior 30-day average, before the freeze-off. Assuming at least some of the oil and gas infrastructure affected by colder weather may have been damaged, the recovery in output could slower than anticipated.
In February 2019, when temperatures in Pittsburgh plunged into the single digits Fahrenheit, Appalachian gas production tumbled nearly 2.5 Bcf/d, or about 8%. While about 60% of that output was restored within two weeks, the full recovery to pre-freeze production levels actually took over six weeks, historical data from Platts Analytics shows.
