High storage, faltering demand dampen Western US gas market outlook

Natural gas prices across much of the Western US are trading near record lows in late May as high storage levels in the Mountain and Pacific regions fuel a bearish outlook for prices there even into mid-summer.

In recent trading, gas prices at Kern River Opal, Northwest Wyoming Pool, Sumas, PG&E Malin and even SoCalGas city-gate have hit record lows around $1/MMBtu. At other hubs in the region, spot gas prices have been trading around similar levels. On May 31, multiple locations across the West were priced at just 80-90 cents, data from Intercontinental Exchange and S&P Global Commodity Insights showed.

Sub-$2 prices at western hubs first appeared in late February with steep discounts lasting through late winter and into the spring. In late May, though, prices across the region hit rarely seen lows, fueled in part by weak shoulder season demand but also by high inventory levels, which seem likely to persist.

Throughout most of May, gas demand across the western US has trended near a record seasonal high, averaging about 8.1 Bcf/d May 1-24. However, from May 25 to 27 demand slumped to just 7.3 Bcf/d, fueling a selloff that pushed prices at many western hubs to record lows well under $1/MMBtu.

Although demand has climbed sharply in the days since, western region inventories remain well above five-year average levels in the Mountain and Pacific Regions, promising to limit the market impact from hotter weather and stronger gas-fired power demand in June.

Inventory

According to the latest data from the US Energy Information Administration, Pacific Region gas storage was estimated at 267 Bcf as of May 24. In mid-March the region's inventory surplus to the five-year average hit an annual high at nearly 80 Bcf but has drifted steadily lower in the weeks since, dropping to just 53 Bcf as of May 24. In the Mountain region, though, strong injection demand has continued to drive the storage surplus higher this month. As of May 24, inventories were estimated at 210 Bcf and are now 88 Bcf, or more than 70%, above the five-year average – the highest yet this year.

With the Pacific and Mountain Region inventory surplus unlikely to subside anytime soon, forward markets are already betting on discounted prices into mid-summer. At hubs across the region, the June balance-of-month gas contracts are trading around $1.30-$1.60/MMBtu. For July, most of the same hubs are currently priced in the low-$2s.

According to a month-ahead outlook from the US National Weather Service, most of the western US will see temperatures trend above average in June. The outlook published May 31 shows a 50-60% chance for hotter-than-normal weather for nearly all of the Rocky Mountain region. Further west, the probability for hotter weather is lower, but still elevated compared with the norm.

Assuming power burn demand continues to outpace the five-year average in June, the western region storage surpluses could narrow substantially by mid-summer, potentially lifting Rockies and West gas prices by late summer, setting up the market for a more bullish outlook heading into the heating season.