Natural Gas In the News: Henry Hub prices remain higher than Northeast hubs

Natural Gas In the News: Henry Hub prices remain higher than Northeast hubs

The U.S. benchmark natural gas spot price at the Henry Hub in Louisiana remains at a premium to Northeast natural gas hubs. The premium increased in the third quarter of 2020, as total Appalachian supply exceeded demand growth and storage levels were above average. Although storage levels fell in 2021, other factors, such as record high Gulf Coast LNG exports, winter freeze-offs in Texas and neighboring producing areas, and Appalachian pipeline outages kept the Henry Hub price premium over Northeast hubs higher than 2018-2020 annual averages in 2021.

In 2020, total Appalachian supply and net imports together were 3% higher than 2019 levels, while Northeast demand remained low, partly as industrial and commercial activity fell following the onset of the COVID-19 pandemic. The natural gas that is not consumed in the region or exported out of the region is injected into storage. The East storage region has about 1 trillion cubic feet of storage capacity to balance seasonal demand against supply. In the first week of September 2020, before the winter withdrawal season started, storage levels were 6% above the five-year average, at 803 billion cubic feet (Bcf). With production growth continuing throughout winter of 2020, and demand remaining muted, natural gas in storage in the East reached near weekly 2016-2020 five-year highs.

While total Appalachian supply and net imports keeps rising, natural gas demand has recently increased as well. Total Appalachian supply and net imports grew by 6% to 30.8 Bcf/d during the first half of 2021, compared to same time last year. This year's first half demand totaled 20.9 Bcf/d, or 0.8 Bcf/d higher than last year's first half values, according to demand data from IHS Markit.

With rising demand, storage levels have fallen below their five-year average and Appalachian prices have risen. For the first eight months of 2021, prices in the Eastern Gas South averaged $2.60 per million British thermal units (MMBtu), or $1.18/MMBtu higher than the same period last year. Other Northeast hubs followed similar trends.

Henry Hub prices have also increased in 2021, and consequently still trades at a premium to Northeast hubs. Several factors contributed to this Henry Hub premium. In 2021, record LNG exports out of U.S. terminals located around the Gulf Coast increased South region demand. This February's winter-freeze disproportionately increased prices in the South Central and Southeast, where processing facilities are not as well winterized as those in the Northeast. In addition, recent pipeline outages reduced southbound capacity out of the Appalachia basin.

Although pipeline capacity out of Appalachia has grown, it has not kept pace with recent production growth. The 2.0 Bcf/d Mountain Valley Pipeline is scheduled to come online in 2022, but it is mostly an intra-region and may not affect basis differentials substantially.