Natural Gas Price Primed to Break Record, Even if Winter is Mild

Low natural gas inventories will persist into the fall and, even combined with the forecast of a relatively mild winter, could propel the Henry Hub price well above its record high of $15.39/MMBtu set on Dec. 13, 2005, analysts say.

“When New England has to buy some $50-$100/MMBtu cargoes this winter and Henry Hub sets new price records, the Biden administration may decide to take action,” Keith Barnett, president of Energy Strategies International LLC (EnSI) told Hart Energy. “Is $25/MMBtu Henry Hub possible this winter? Yes!”

Barnett was referring to the possibility of President Joe Biden’s administration limiting LNG exports to non-free trade agreement (FTA) countries in the event of a drastic gas price spike. U.S. LNG exports through June totaled 1.8 Tcf to non-FTA countries, which include Europe and Japan. LNG shipments to FTA countries only accounted for 300 Bcf.

The concern stems from oil policy described in a letter from Energy Secretary Jennifer Granholm to oil refiners on Aug. 18. She urged seven major refiners to prioritize building inventories of gasoline and other fuels over exports ahead of what is historically peak hurricane season.

If that policy precedent is applied to natural gas, it could involve pulling the plug on LNG exports to shore up domestic inventories. That could create a foreign policy dilemma, given the administration’s commitment to supply LNG to European allies supporting Ukraine in its war with Russia. The European gas crunch has been exacerbated recently with Russian gas company Gazprom shutting flow from the Nord Stream 1 for three days, claiming technical issues stemming from western sanctions.

However, the Dutch TTF natural gas price, Europe’s benchmark, slumped in the final days of August from its peak in the mid-$90s. Two factors contributed to the price cut: the announcement that European gas storage reached 80% of capacity two months ahead of schedule; and the EU saying it would not shy away from direct market intervention if necessary.

Low storage

For the week ended Aug. 19, natural gas storage in the Lower 48 was 12% below the five-year average (2017-2021). At the start of the year, storage was 2.4% above the average, but declines in oil production resulted in reduced production of associated natural gas.

Industry surveys reveal an expectation of about 3.4 Tcf in inventory at the end of the gas refill season on Oct. 31. That total would be 6% below end-of-season 2021 and 7.5% below the five-year average.

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“If … these levels materialize with Freeport [LNG] coming back online at roughly the same time, we see gas prices testing their all-time high of $15.378 from December 2005 and persisting in double digits at Henry Hub for an extended time, easily exceeding the 70-day trading streak in 2008,” EnSI said in a recent report. “We think that is a probable outcome since weekly injections do not seem likely to rise enough to match last year or the five-year average EOS (end of season) inventory.”

The exception to the price record was a unique double-digit spike in February 2021 that reached $23.86/MMBtu.

Then again, it’s no longer December 2005, when Texas beat Colorado 70-3 in the Big 12 championship game. To account for 52% inflation since, experiencing the same relative pain as $15.39/MMBtu means the price would have to hit $23.35/MMBtu in 2022. This, as Barnett has affirmed, is a distinct possibility.

Less-than-normal demand

Labor Day weekend is a bit early to finalize weather predictions for the winter, although that didn’t discourage “The Old Farmer’s Almanac 2023.”

“The eastern half of the U.S. should brace for potentially record-breaking cold to define the season,” the “Almanac” proclaimed in late August. “This frigid forecast extends to the Deep South and Texas, which could see the mercury diving as much as 8 degrees F below normal!”

AccuWeather Inc., which relies more on sophisticated modeling and less on exclamation points, disagrees.

“Overall, we are leaning toward less than normal heating for the cold season in the Northeast,” Paul Pastelok, lead long-range forecaster and senior meteorologist, told Hart Energy.

Forecasting natural gas usage and prices depends on the forecast for heating degree days (HDD). A degree day compares the mean outdoor temperatures to a standard temperature, usually 65 degrees Fahrenheit (F). So, a 40-degree F day would be considered 25 HDD. If the expected HDD in a region like the Northeast is forecast to be higher over a time period, traders can expect higher demand for gas to meet higher heating demand. If the forecast calls for a lower HDD than in previous years, anticipated demand will be lower, as well.

“Our preview of the winter shows a more neutral to occasionally chilly pattern in November and early December in the Northeast, milder for the mid-Atlantic,” Pastelok said. “There were a couple of years of interest that had a late October and early November snow event for the interior Northeast, which could be the case again this year.”

The polar vortex may play a key role on the rest of December into January, he said, with the combination of a stronger vortex and the La Niña pattern keeping most of the cold near the pole and western Canada.

“This results in milder-than-normal air for the Northeast, less heating compared to normal,” Pastelok said.

The predictions he shared were preliminary and AccuWeather’s official forecast for customers won’t be released until mid- to late September. While the back end of winter can turn colder than normal, Pastelok’s team is leaning toward slightly less heating than normal for the Northeast.