The Daley Note: July 19, 2023
Henry Hub gas futures have been climbing for the balance of 2023 as building summer heat lifts expectations for a tighter market. However, market participants should heed that Lower 48 storage inventories remain healthy as we approach the halfway point of the traditional summer injection season.
East Daley’s latest Macro Supply & Demand Forecast projects gas inventories will remain ~350 Bcf above the 5-year average at the end of July, a surplus first reached in February 2023. Working gas totals 2,930 Bcf for the July 7 week, according to the latest EIA storage report, 569 Bcf above a year ago and 364 Bcf above the 5-year average.
The relationship between the storage deficit/surplus to the 5-year average and the spot Henry Hub price is often well correlated, but the relationship between the deficit/surplus to the 5-year average, and the prompt month and forward strip can often go awry.
East Daley forecasts summer 2023 Henry Hub spot prices to average $2.26/MMBtu, much lower than the seasonal out-month contracts on the Nymex forward curve. With an abundance of gas underground, we expect prompt-month prices to deteriorate as they move closer to expiry each month.
Storage levels remain elevated through November in our model and keep gas prices under pressure. In our ‘unconstrained’ Macro forecast, storage peaks at 3,909 Bcf at the end of October. US storage levels have exceeded 3,900 Bcf in only four other injection seasons since 2006 (when EIA began tracking weekly storage changes). At those times, Henry Hub spot prices traded from a low of $2.09/MMBtu in November 2015 to a high of $3.44 in November 2012.
In weighing the potential price response later this year, we discount the 2012 results, since gas production from tight oil development was significantly lower then. The market situation in November 2020 was also an anomaly, driven by turmoil from Covid lockdowns. The industry was in full retreat at the time, while supply and investment are now in an expansion cycle. We forecast a $2.40/MMBtu Henry Hub price at the end of October ‘23.
If gas prices fall as we expect, they will stimulate more demand and trim supply at the margin. In our ‘constrained’ Macro forecast, storage inventories peak at 3,819 Bcf at the end of October. We do see reason for some price strength in spot and prompt prices as the market enters the 2023-24 winter, culminating in just a 97 Bcf storage surplus exiting December 2023. - Jack Weixel
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