Henry Hub joins the global gas rally

Whilst extreme weather through 2021 has drawn inventory levels below the five-year average, several emerging structural factors have limited the ability of the US gas market to react flexibly to the short-run conditions presented by the weather. These include: 1) The increasing share of price-inflexible consumption in the demand stack, with LNG feedgas flows actualising at ~10.5bcf/d and Mexican piped exports stepping up on infrastructure completion. 2) The inelasticity of marginal gas supply (associated gas in the Permian basin) to higher prices, with oily operators keeping activity levels static amidst a broader trend of capital discipline irrespective of natural gas prices . Our modelling for the upcoming winter indicates tightness , with balances implying the market will be 1bcf/d tighter year-on-year. The surge in export demand will not be offset by either supply growth, or a flex downwards in power burns. We subsequently see inventories ending winter well below the five-year average and 2020 levels, despite entering the withdrawal season with balances relatively close to the five-year average. Our current end - winter inventory target is 1.32tcf. It is becoming increasingly clear that natural gas prices must hold at a level that justifies investment in additional dry gas supply (rather than relying on associated gas supply growth to balance the market) . We therefore expect Henry Hub to trade above $3.00/MMBtu for the balance of 2022 to incentivise dry gas producers to meaningfully increase activity levels.