U.S. and European gas market dynamics contributed to gas price volatility in both markets over the past four months. Mild winter weather in both regions boosted storage surpluses early in the season. But in the U.S., that weather masked a tight market — demand ran well ahead of supply. The U.S. supply-demand balance reversed trend by mid-March, with supply outpacing demand significantly through May (Figure 1). In Europe, the storage surplus pushed even higher.
What caused the fundamental shift? COVID-19 containment measures sharply reduced U.S. demand and accelerated weakness in already oversupplied global markets. By the end of the withdrawal season (March 31), European storage totaled 2,041 Bcf, 973 Bcf above the five-year average (Figure 2). Storage continued to fill quickly in Europe, and on May 31 inventories hit ~75% of previous record highs. With storage constraints looming, global prices collapsed and U.S. cargo cancellations — which require as much as two months lead time — began adding up. U.S. LNG feedgas demand sank from a high of ~8.8 Bcf/d in February to 4.1 Bcf/d in June. Higher-than-normal injections in April, May and June built up the US storage surplus, and the Henry Hub prompt-month contract slogged to its lowest settle in the last 20 years at $1.48/MMBtu in the last week of June.
With the easing in COVID-19 lockdowns through June and July, a recovery in power demand tightened up the U.S. supply-demand balance (Figure 1). Hotter-than-normal weather in July further boosted power burn and cut into injections relative to the five-year average despite weaker feedgas demand. This month’s low LNG U.S. feedgas reflects the tight spread between L48 and global hub prices in mid-May, when companies made decisions to cancel July cargo loading. Injection rates into European storage also slowed down (Figure 3), suggesting the canceled cargoes are starting to rebalance the global markets. Watch for a potential rebound in August U.S. feedgas demand now that European hubs are trading at a ~$0.30/MMBtu premium to Henry Hub for September delivery. Stronger feedgas demand could swing the supply-demand balance back to the previous trends from before March.
FIGURE 1 | US Supply-Demand Balance
FIGURE 2 | European Storage Inventories
FIGURE 3 | US and European Storage Injection Rates Relative to the Five-Year Average