Summer heat promises continued retreat for South Central gas storage surplus

Strong industrial and gas-fired demand across the South Central US is quickly eroding the region's gas storage surplus this spring. With looming hot weather promising more momentum for the trend, tightening market fundamentals in the region could set the stage for a bull market by late summer.

In May, total gas demand across the US Southeast and Texas has averaged a record-high 29.7 Bcf/d – even excluding demand from pipeline exports and the region's numerous LNG liquefaction terminals.

Month to date, gas demand is up 750 MMcf/d compared with the same three-week period last year. So far, industrial end-users have accounted for over 60% of that incremental demand while the rest is attributable to power generators. Compared with three-year average demand for the Southeast and Texas, burns are up about 2.4 Bcf/d this month, data from S&P Global Commodity Insights showed.

Although the Southeast and Texas comprises a distinct, slightly larger group of states compared with the US Energy Information Administration's South Central region, market fundamentals in the former can provide significant insight on the latter. Notably, stronger gas demand in the Southeast and Texas this spring has correlated with a steady narrowing in the South Central region gas storage surplus.

Narrowing surplus

Over the past eight weeks, the region's storage surplus has been in steady retreat. According to EIA's latest inventory report, stocks are now estimated at 207 Bcf above the five-year average as of the week ended May 10 – down from an annual high at over 290 Bcf surplus in mid-March.

For the next two weeks, and through this summer, temperatures across the Southeast and Texas are forecast to trend above average, likely keeping cooling demand sufficiently elevated as to limit injections to South Central storage, and potentially promp an early start to the mid-summer withdrawal season.

According to a short-range forecast from Commodity Insights, the US Southeast population-weighted temperature will average about 1.7 degrees Fahrenheit above normal over the next 14 days, keeping demand about 1.2 Bcf/d above average. In Texas, the population-weighted temperature is forecast to trend nearly 4.4 degrees above normal lifting demand to nearly 1.3 Bcf/d above average. Over the short term, many analysts are projecting more below-average injections to South Central storage, keeping the surplus falling. For the week ended May 17, Commodity Insights has already forecast an injection of just 16 Bcf which compares with a five-year average of 24 Bcf.

According to the US National Weather Service, temperatures across the Southeast and Texas will also trend well-above average this summer, likely keeping demand for gas-fired cooling elevated in June, July and August. The agency's three-month outlook published May 16 shows a 50-60% chance for a hotter-than-normal for most of Louisiana and Texas over that period. Across Oklahoma, Arkansas and the Southeast the probability for hotter weather during the peak-summer months is only slightly lower at 40-50%.

Assuming the Weather Service forecast is accurate, the Southeast and Texas could see another record summer season for gas-fired power demand. Presuming further that the South Central inventory overhang can be erased, or nearly erased, by late summer, tighter market conditions could set the stage for another price rally heading into the colder months.