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Freeze offs, storage drawdowns leave gas futures, forward markets unconcerned

The US natural gas market continues to tighten this month as frigid weather fuels a wave of freeze-offs across Texas and the Midcontinent, slashing domestic production and increasing the call on gas storage. Despite tightening fundamentals, the NYMEX futures market continued to sell off in Feb. 7 trading.

Over the past week, freezing temperatures across the central US are the likely culprit behind a nearly 4 Bcf/d contraction in output, which has fallen to an average 86.7 Bcf/d in February, data from S&P Global Platts Analytics shows.

The same wintry weather has pushed US gas inventories into deficit recently, with oversized storage drawdowns promising to keep winter supply tight and summer injection demand strong.

With more cold weather now in the forecast for the US Northeast, the US supply-demand outlook now appears increasingly bullish, even as the selloff in the gas futures and forwards markets continues.

On Feb. 7, the NYMEX Henry Hub prompt-month futures contract for March was down another 30 to 40 cents to trade around $4.20/MMBtu, tumbling from its Feb. 2 settlement at $5.50. The balance-2022 forward curve has been on a similar trajectory, most recently settling to an average $4.61/MMBtu on Feb. 4, down from $5.16 just two days prior, data from CME Group and S&P Global Platts showed.

Weather, production
Over the past week, low temperatures in West Texas and Oklahoma have plunged into the teens and even single-digits Fahrenheit in some location, with gas production in the Permian Basin and the SCOOP-STACK taking a hit.

After briefly dipping below 12 Bcf/d last week, production in the Permian rebounded over the weekend, rising to around 13.2 Bcf/d on Feb. 7 – still some 500 MMcf/d below its prior 30-day average.

In the SCOOP-STACK of Oklahoma, production has yet to recover from a steep drop earlier this month. On Feb. 7, output was estimated around 3.4 Bcf/d, or about 300 MMcf/d below its pre-freeze average.

Along with weather-related production declines in the Bakken and the Denver-Julesburg, US output has fallen to its lowest this month since last winter’s historic freeze. Data from previous freeze-off events, including the February 2021 freeze, suggests that supply impacts could linger over the next two to three weeks, likely keeping the US market more reliant on storage to meet demand.

During the week ended Jan. 28, the US gas industry made its largest withdrawal yet for the 2021-2022 heating season, pulling an estimated 268 Bcf from inventory with the drawdown cutting stocks to a 143 Bcf deficit to the five-year average, data from the US Energy Information Administration showed.

For the coming two reporting weeks, Platts Analytics has forecast above-average storage withdrawals to continue, cutting stocks to a more than-270 Bcf deficit to the average in the week ending Feb. 11.

Even assuming roughly average drawdowns continue over the balance of winter, US inventories would end the heating season below 1.4 Bcf, triggering strong summer injection demand in a bullish setup for balance-2022 gas prices.
Source: Platts

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