Heat wave set to disrupt US Northeast spot gas prices' recent buoyancy

Spot gas prices in the US Northeast and Appalachia have observed narrower basis discounts to cash Henry Hub over the last several weeks, a dynamic that is set to reverse in the near-term as warmer-than-normal temperature forecasts enter the scene.

Eastern Gas, South spot gas has had its basis spread to cash Henry Hub tighten to a 39.50 cent discount as of preliminary settlement April 7, up from trading more than $1/MMBtu lower than the national benchmark during the third week of March.

Further north, the discount of Transco Zone 6 New York spot gas to cash Henry Hub came in at 16.50 cents at its April 7 preliminary settlement after averaging a 65-cent discount in the latter half of March.

Elevated residential-commercial gas demand in the Northeast has helped to tighten regional spreads, with S&P Global Commodity Insights data showing that res-comm demand came in around 280 MMcf/d,or 3% higher this April than in April 2021.

The daily Northeast temperature has averaged 2.4 degrees Fahrenheit lower than normal so far this month, according to CustomWeather.

The strong res-comm demand has also helped insulate regional spot gas prices from increased regional gas production. Northeast gas production has averaged 33.1 Bcf/d so far this month, up 200 MMcf/d from its March average of 32.9 Bcf/d.

Warmer temperatures forecast

Dramatically warmer temperatures are set to interrupt this supply-demand balance, however, with analysis from S&P Global expecting gas demand to fall sharply. Without the support of local gas demand, regional spot gas prices could see basis spreads widen substantially.

CustomWeather forecast that the average Northeast temperature will rise into the low 60s Fahrenheit for April 12-14, which would be nine to 11 degrees higher than normal for April.

Forecasts from the National Weather Service echoed this prediction, with the agency's six- to 10-day outlook showing a strong probability of higher-than-normal temperatures ahead for the entirety of the eastern seaboard for April 12-16. The outlook for the Northeast had even more certainty attached to it, with the weather service assessing major metropolitan centers New York City and Boston to have a 70%-80% chance of above-normal temperatures.

S&P Global projected that Northeast res-comm demand would average 5.3 Bcf/d for April 12-14, down 45% from the month-to-date average of 9.6 Bcf/d.

Looking ahead

As of 1pm ET April 7, Eastern Gas, South's balance-of-the-month contract was trading at $5.45/MMBtu on the Intercontinental Exchange, a 66-cent discount to Henry Hub's balmo contract's $6.11/MMBtu.

Looking further ahead, Eastern Gas, South's May contract was trading on the Intercontinental Exchange at a 74-cent cent discount April 7, and the June contract was trading at a 75-cent discount, suggesting market expectations that the spreads would widen beyond current levels as the shoulder season shifts toward summer.