- Natural gas futures surge as lower production confirmed
- Weather models point to continued chilly weather in the East
- Cash rallies amid increasing demand, slew of pipeline maintenance
Coming off a mild winter, weather models that showed chilly weather lingering a bit longer aided a rebound for natural gas futures to start the week. Reinforced by a sustained drop in production that first showed up at the end of last week, the June Nymex gas futures contract climbed 10.3 cents to settle Monday at $1.993. July rose 9.6 cents to $2.230.
Spot gas prices rallied with cooler weather sweeping across the northern United States and pockets of heat in the Southwest and Texas. NGI’s Spot Gas National Avg. shot up 19.0 cents to $1.710.
The latest weather data intensified the cold shot expected to hit the Midwest and East this week, adding gas-weighted degree days (GWDD) for each of the next 10 days, according to Bespoke Weather Services. The firm noted, however, that May is a time when heating degree days tend to have much less impact on actual natural gas demand, “so it is unclear if this move is really all that bullish, but the cold is impressive for this time of the year.”
Although colder trending over the weekend, the European model also favored a warmer pattern emerging in the eastern United States, a trend Bespoke expects to occur moving into the latter part of May.
NatGasWeather added that natural gas markets likely prefer hotter trends instead of cooler trends as it would portend a hot summer to come instead of one that is slow to arrive. Regardless, the firm expects this to be “another volatile week.”
Highlighting the June contract’s brief move above $2, NatGasWeather said that prices also tested that level on Friday before selling off, “making this an important level bears seemingly need to hold.”
EBW Analytics Group agreed. The firm noted that prices may start off strong this week due to the revised weather forecasts calling for near-record GWDD in the second week of May and signs that production of associated gas is starting to rapidly decline. Further indication of partial economic reopenings across the country also may support prices.
However, “the rubber meets the road” on Thursday, when the Energy Information Administration is expected to report a string of triple-digit storage injections that potentially could add 1.1 Tcf to inventories by the end of June, nearly doubling the storage surplus versus the five-year average.
“If this pattern verifies over the next few weeks, the front-month contract is likely to decline significantly,” EBW said.
BofA Global Research analysts view any sustained gas price strength as being a 2021 story. Although the BofA team agreed that the associated gas outlook is deteriorating further, it expects demand losses from the power, industrial and liquefied natural gas (LNG) sector to largely offset the associated gas production declines this summer, leaving the market oversupplied.
“As such, we maintain our $1.75/MMBtu summer price forecast, but are concerned that timing mismatch between various supply and demand changes will drive higher volatility,” said the BofA analysts, led by Clifton White. “Changes in oil production, based on a combination of perception of competitor behavior and oil prices, may not perfectly match the timing of LNG, power or industrial demand changes.”
Once European storage fills, there will be nowhere else to take excess LNG cargoes, according to BofA. Analysts pointed out that there are already reports of canceled U.S. LNG export cargoes for June, and with high U.S. storage inventories, the domestic gas market will have a difficult time balancing this summer.
“We previously thought either the Midwest power sector or dry gas production would need to step up and balance the global gas glut. But now the collapse in oil prices may unintentionally bail out global gas markets this summer,” analysts said.
The BofA team has increased the price forecast for 2021 to $2.75, from $2.45, on expectations for lower stocks next year due to accelerated associated gas production declines. However, demand risks like reversing coal-to-gas switching and possible LNG curtailments again next summer limit the team’s “enthusiasm” for 2021 prices for now.
“The oil price path will have a meaningful impact on term natural gas prices,” said analysts.
Continued oil demand destruction post Covid-19 could keep pressure on oil prices and production, according to BofA, but the drilled but uncompleted (DUC) well inventory could support future production at lower oil price breakevens, since the drilling costs are sunk.
“The weak oil price environment and related associated gas production declines might make dry gas basins great again.”
Rallying Cash
Spot gas prices across the Lower 48 were strong to start the first full week of May thanks to intensifying heat on the West Coast and tumbling temperatures on the East Coast.
Starting with the West, AccuWeather forecasters said that temperatures are to start ramping up on Tuesday as an area of high pressure builds over the region, with each day into late week becoming increasingly hotter. By the middle and latter part of the week, high temperatures are forecast to soar back into the lower 80s in San Diego, upper 80s to lower 90s in Downtown Los Angeles and in the 100s across the deserts, according to the forecaster.
Farther north, temperatures were expected to trend upward as well, with highs mainly in the 80s on Tuesday and Wednesday and then in the 90s on Thursday and Friday.
“The surging temperatures can accelerate the spring thaw in the mountains, causing streams to run fast and furious,” said AccuWeather senior meteorologist Alex Sosnowski.
The blast of heat comes as Pacific Gas & Electric Corp. (PG&E) is set to begin maintenance this week that it initially postponed due to Covid-19, cutting imports by more than 250 MMcf/d for over three weeks. Planned maintenance on Line 401 will take Redwood Path flow capacity down to 1,725 MMcf/d for nearly all of the 24-day duration, according to Genscape Inc. Only the first day of the work, Wednesday (May 6), will have a different capacity limit at 1,770 MMcf/d.
“The 1,725 MMcf/d limit would represent a cut of 263 MMcf/d versus the previous three-year average for these dates,” Genscape analyst Joseph Bernardi said.
In postponing the work from the original March 19 start date to May 6, the estimated impact of this work more than doubled, to 263 MMcf/d from 127 MMcf/d, based on historic averages of Redwood Path flows by date, according to Genscape. However, much of that excess flowing supply would likely have been destined for storage, Bernardi said.
“Average demand sloughs off considerably from the original March-April time frame of this work to the current May timeframe, while withdrawals increase nearly 50% over the same span,” said the analyst. “With PG&E’s total storage at nearly 120% of its three-year average, the increased impact of this work on flowing supply will likely be mitigated by the reduced need to build up inventories.”
PG&E Citygate next-day gas jumped 15.5 cents to $2.495, while sharper gains were seen in Southern California.
Gains of 10-20 cents were common throughout the Rockies and Texas, where Waha cash was up 10.5 cents to $1.570 and Carthage was up 13.0 cents to $1.660.
Stronger increases were seen farther east as cooler weather was seen returning to the region after a mild weekend, with afternoon temperatures plummeting 10-20 degrees lower early this week, according to AccuWeather. By Tuesday, most locations can expect temperatures in the 50s, and high elevations in New England may be limited to the 40s each day, the forecaster said. Even colder air will settle over the Northeast into the end of the week, dropping temperatures to around 10-15 degrees below normal for the beginning of May.
The lingering chill boosted next-day gas at Algonquin Citygate up 32.0 cents from Friday to average $1.625, with similar increases seen across the Northeast. In Appalachia, Tennessee Zone 4 Marcellus spot gas jumped 42.0 cents to $1.565, though most other pricing hubs in the region climbed between 20 and 30 cents from Friday.
Meanwhile, Tennessee Gas Pipeline on Monday began scheduled maintenance at the Station 317 compressor station, impacting nearly 0.3 Bcf/d of southwest flows out of Pennsylvania through Wednesday, according to Genscape analyst Preston FusseeDurham.
Also, pipeline work was scheduled to begin Tuesday on Rockies Express Pipeline (REX) that could limit up to 185 MMcf/d of westbound flow in Ohio from Tuesday through Saturday. The work being performed at the Hamilton Compressor Station will limit flows through SEG 370 to 2,592 MMcf/d, Genscape analyst Anthony Ferrara said. Over the past 30 days, flows through SEG 370 have averaged 2,608 MMcf/d and maxed at 2,777 MMcf/d, Genscape flow data shows.
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Natural Gas Futures Rebound as Production Declines, Demand Added to Weather Models - Natural Gas Intelligence
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