Rising premium at Henry Hub drives more Texas gas eastbound

Premium gas prices at the US benchmark Henry Hub are driving more natural gas from Texas eastbound as the Gulf Coast market prices up to meet record LNG exports and a resurgence in industrial demand.

Last autumn, as spot gas prices at the Henry Hub tested historic highs at over $5/MMBtu, the cash markets in East Texas appeared to dislocate, widening their discount to the benchmark.

In April, basis prices at key East Texas locations are down sharply on the year. At Katy Hub, the cash market has traded nearly 18 cent behind Henry Hub; at Houston Ship Channel prices have averaged about 20 cents below the benchmark. In April 2020, both hubs traded at a roughly 3-4 cents premium, data from S&P Global Commodity Insights shows.

Weaker basis prices in the East Texas market come as Henry Hub and other nearby locations price up in response to growing demand along the US Gulf Coast – mainly from Louisiana's LNG export terminals.

Demand

In 2022, LNG feedgas demand from Louisiana's three operational terminals alone has averaged nearly 7.3 Bcf/d. Including demand Kinder Morgan's Elba Island terminal in Georgia, total feedgas demand across the US Southeast has averaged over 7.6 Bcf/d this year – up from an average 6 Bcf/d over the same four-month period in 2021, S&P Global data shows.

Record LNG export demand in the Southeast has also been bolstered by a resurgence in industrial gas demand in 2022, and an uptick in gas-fired power burns by the region's generators.

In April, industrial demand across the US Southeast has averaged nearly 6.3 Bcf/d to trend at its highest for the springtime month since 2018. Rebounding consumer demand, stronger refinery runs along the US Gulf Coast, and slightly colder weather this winter have all been supportive of stronger industrial demand in 2022, according to a recent analysis published by S&P Global.

Gas demand from the power sector is also up across the Southeast. Over the past 13 months, power generators across the region have retired over 2.2 GW of coal-fired capacity, much of which has likely been replaced by natural gas. This winter, and especially this spring, a surge in coal prices has likely also prompted additional coal-to-gas fuel switching. In April, gas-fired power demand in the Southeast has averaged nearly 8.8 Bcf/d, setting a record high for the month, S&P Global data shows.

Outlook

For June through October, the forward market is pricing in basis discounts of about 14 cents at both Katy Hub and Houston Ship Channel. While both hubs are priced at a premium during the peak winter months of 2022-2023, even steeper basis discounts are expected to return to the East Texas gas market in summer 2023 and summer 2024, S&P Global data shows.

As LNG export demand continues to grow in Louisiana with the potential startup of future projects by Venture Global, Tellurian and others, its appears likely that the Southeast and Gulf Coast gas markets will continue to price at steeper premiums vis-à-vis East Texas.