With hot weather starting to penetrate parts of the United States and export demand expected to return to near-record levels following spring maintenance, natural gas forward prices strengthened for the trading period ending May 26, according to NGI’s Forward Look.
Gains were weighted to the front of the curve, with June prices rising an average 6.0 cents for the May 20-26 period, while the balance of summer (June-October) tacked on only 3.0 cents on average, Forward Look data showed. Similarly small increases were seen for the winter 2021-2022 strip (November-March) and the summer 2022 (April-October) package.
West Coast markets moved against the pack during the trading period, with stout losses in Southern California leading the move lower as temperatures retreated from earlier highs back to more seasonal levels. NatGasWeather said warmer conditions would return over the Memorial Day holiday weekend, “although with highs mainly in the 80s and not enough coverage of 90s to intimidate.”
SoCal Border Avg. June forward prices fell 9.0 cents from May 20-26 to $3.405, while July plunged a much steeper 20.0 cents to $4.298, according to Forward Look. The balance of summer finished 8.0 cents lower at $4.15, with the winter 2021-2022 strip off 14.0 cents to $4.390 and the summer 2022 strip off 11.0 cents to $3.040.
Other western hubs posted minor decreases at the front of the curve and small gains beyond the June contract. The relative weakness compared to other U.S. markets spilled over into the Permian Basin’s upstream hubs.
El Paso Permian June forward prices slipped 2.0 cents from May 20-26 to reach $2.765, while July held steady at $3.013, according to Forward Look. The balance of summer edged up a penny to $2.970, as did the winter 2021-2022 strip, which averaged $3.210.
Summer Risk
The modest decreases out West fail to reflect the bullishness expected to play out in the region this summer.
Federal regulators have said California, in particular, faces an “elevated risk” of supply shortfalls. Up to 11 GW of additional power may be needed in the late afternoons to offset declines in solar output. This is in contrast to 1 GW of transfer needed on a normal peak day, according to the North American Electric Reliability Corp.
The California Independent System Operator has indicated that power supplies are in better shape than last year, when rolling blackouts had to be implemented to meet demand. However, the grid operator acknowledged that the state is “still susceptible to stress during extreme heat waves” across the West.
The heightened risk this summer comes at a time when the Los Angeles City Council is urging Gov. Gavin Newsom to accelerate closing the Southern California Gas Co. (SoCalGas) Aliso Canyon storage facility. The facility was the site of the country’s largest methane leak in October 2015.
SoCalGas has maintained that Aliso continues to play “a vital role in the resiliency of California’s energy system.”
A Longer Wait
On a national level, Nymex futures have been stubbornly range bound for a month or more, with sustained trading above the $3.00 level so far elusive.
That looked to change earlier in May when weather models finally added meaningful heat to the long-range outlook — with the prompt-month contract briefly spiking to $3.15. However, cooler trends in subsequent runs quickly sapped momentum. The June Nymex contract, which rolled off the board Wednesday, rallied on the day but still fell short, setting at $2.984.
High international gas prices favor strong U.S. liquefied natural gas (LNG) exports throughout the summer. At the same time, early records in pipeline exports to Mexico portend more records once the summer heat settles in. These factors provide a recipe for a sustained step-up in prices, but recent storage data is adding a wrinkle to that theory.
For the second week in a row, the U.S. Energy Information Administration (EIA) surprised to the bearish side, reporting a lower-than-expected injection into storage inventories for the week ending May 21. After last week’s 71 Bcf build breezed past estimates calling for an injection near 60 Bcf, Thursday’s 115 Bcf build crushed expectations that were closer to 106 Bcf.
Market observers on The Desk’s online chat Enelyst credited higher production figures for the miss. However, they noted that demand along the Gulf Coast was tepid given the torrential downpours that saturated the region throughout the week.
As such, the South Central region reported the largest storage increase week/week, adding 43 Bcf into stocks, according to EIA. This included a 27 Bcf injection into nonsalt facilities and a 16 Bcf injection into salts.
The East and Midwest each added 27 Bcf to inventories, while the Mountain and Pacific regions each added 9 Bcf, EIA said.
Total working gas in storage as of May 21 stood at 2,215 Bcf, which was 381 Bcf below year-ago levels and 63 Bcf below the five-year average.
Enelyst managing director Het Shah said May transition weeks are usually tough to call. With wind generation penetrating much more of the generation stack, “it’s going to be a wild number.”
Looking ahead to next week, Shah said he was projecting a 93 Bcf injection. This would reflect inventory changes for the current week, including steady export demand but stronger power and industrial demand. “Another 100-plus Bcf number next week would send us back to those mid-Apri price levels.”
Bespoke Weather Services, which had called for a 109 Bcf injection, said it was not bearish enough with its forecast. The last two weeks have “definitely” brought about a notable loosening in supply/demand balances, the firm said. This has already brought the new prompt month July contract right back to the middle of the long-running $2.90 to $3.00 prompt-month trading range.
“Given some heat in the forecast, that may keep support at the bottom of this range, but the balance makes it tougher to rationalize breaking above $3.00 for awhile,” Bespoke said.
Eye On Production
EBW Analytics Group agreed on the weaker near-term outlook, especially with the three-day holiday ahead. The firm noted that the long weekend typically brings about one of the largest injections of the year. Demand weakness, it said, is enhanced this year by rapidly weakening weather-driven demand and faltering LNG exports amid maintenance. A potential production uptick as spring pipeline maintenance wraps up also stands to hold down prices.
EBW also pointed out that the cooling season in the South Central region remained suppressed, with temperatures projected to slide below 30-year norms into the week first of June. “Instead of an early summer heat watch, the primary near-term concern may be elevated precipitation leading to localized flooding. Without the South Central, it will be difficult to generate sustained, significant above-normal cooling demand early in the summer.”
Near-term softening in the storage trajectory could soon point to a retest of support in the low $2.80s. While comparisons from a year ago are relatively robust because of exceptionally weak year-ago conditions amid Covid-19, the next three weeks could see the supply/demand balance run 1.2 Bcf/d looser than the five-year average, according to EBW.
“Although this is largely due to bearish weather, it may coincide with an increase in production tied to the end of spring maintenance, with the possibility that transient bearish weather merges with a one-time uptick in production for a decline in Nymex futures.”
Production as of Wednesday was back near 91.5 Bcf/d, according to various estimates. However, it appears further growth is set to remain subdued for the remainder of the year.
Enverus on Thursday said the U.S. rig count tumbled for the second week in a row, indicating that last week’s sudden drop was “more than a blip caused by rig downtime.” As of May 26, there are 511 rigs running, down by nine on the week, according to Enverus’ Rig Analytics group. The count was down 4% in the last month, but up 63% year/year.
The largest month/month decline by region occurred in Appalachia, where rigs fell by four to 45, Enverus said. The firm noted that four operators reduced their rig counts by one rig apiece: EQT Corp., Gulfport Energy Corp., HG Energy LLC and Range Resources Corp. Gulfport is now running a single rig; the other three companies had two rigs each.
Capital expenditure budgets have been set for 2021 and are flat year/year, Enverus said in a recent blog. “We expect to see limited upward revisions to activity levels given the market’s recent favorable reactions to public operator capital discipline.”
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