Natural Gas Futures Prices Defy Fundamentals, Rise Again - Natural Gas Intelligence

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July natural gas futures touched $3.200/MMBtu early Thursday, but government storage data confirming a continuation of loose balances quickly drained momentum. The July Nymex contract ultimately settled at $3.149, up only 2.0 cents day/day. August climbed 2.2 cents to $3.166.

At A Glance:

• Tetco issues could last through September
• Coal struggling to sub for gas despite higher prices
• Hot weather fuels gains for cash markets

Spot gas prices continued to weaken in some areas of the United States, with the only significant heat remaining in the central and southern United States. Gains in those regions, and pockets of small increases elsewhere, lifted NGI’s Spot Gas National Avg. by 3.0 cents to $2.900.

With weather models continuing to reflect only minor changes in recent runs, Thursday’s storage data was seen as the main driver of any potentially meaningful change along the Nymex futures curve. However, a cooler run in the latest Global Forecast System model brought prices down another few ticks.

As for storage, the Energy Information Administration (EIA) reported a 98 Bcf injection into inventories for the week ending June 4. The figure itself fell very close to consensus, and came in shy of the triple-digit build that some analysts had been expecting.

However, the 98 Bcf injection still showed the loosening in the market that has occurred amid the recent rise in futures prices. Breaking down the EIA report, Bespoke Weather Services said it was maintaining the view that the market has outrun the fundamentals, “at least for now.”

The firm sees risk for some pullback in prices, “which could be underway” given the retreat that took place immediately after the EIA report. Hot weather is the main bullish item the firm sees that limits downside risks until the market proves it can tighten on a weather-adjusted basis. “On that, we shall see.”

Estimates ahead of the EIA report had pointed to an injection in the 90s to low 100s Bcf. NGI had modeled a 100 Bcf build for the report. Last year, EIA recorded a 95 Bcf injection for the similar period, and the five-year average is a build of 92 Bcf.

Broken down by region, the East added 32 Bcf into storage, and the Midwest added 25 Bcf, according to EIA. South Central stocks climbed by 24 Bcf, including 22 Bcf into nonsalt facilities and 2 Bcf into salts. The Mountain and Pacific regions each rose by less than 10 Bcf.

Total working gas in storage as of June 4 stood at 2,411 Bcf, which is 383 Bcf below last year and 55 Bcf below the five-year average, EIA said.

Participants on The Desk’s online energy chat Enelyst noted that reduced liquefied natural gas (LNG) demand stemming from maintenance events had loosened up supply/demand balances in recent weeks. However, once the maintenance season concludes, a much tighter backdrop could develop.

“July could be quite tight, especially if production starts to taper and LNG/Mexican exports pick up,” said Enelyst managing director Het Shah.

Shah was joined by Criterion Research LLC analyst James Bevan, who said exports to Mexico have room to grow. He noted that peak exports south of the border typically don’t occur until August or September, and there appears to be about 0.5 Bcf/d or more of runway.

“The trend has been rising since April, so we will see if it can ramp that high,” Bevan said.

LNG capacity also is set to climb. Criterion Research is modeling about half of Calcasieu Pass LNG’s capacity coming online before the end of the year. Sabine Pass LNG’s sixth production unit also is expected online by December.

Another Bullish Factor

While weather forecasts always pose the most immediate risk to prices in the near term, EBW Analytics Group said a potentially more important risk is the growing likelihood that the Pipeline and Hazardous Material Safety Administration (PHMSA) order reducing Texas Eastern Transmission (Tetco) pipeline pressures by 20% would be long lived.

Tetco reportedly may need to reapply for a permit before restrictions are lifted. This could be a multi-month process, “especially under a less pipeline-friendly Biden administration,” according to EBW.

“There are few concrete details, but the fact that the issue was not quickly resolved — and the potential to get bogged down in regulatory purgatory — suggest that supply risks could be considerable,” the firm said.

In the short term, EBW said reduced line pressures could lead to increased storage injections in the East region as gas supply is redirected toward reducing current local deficits.

This appeared to be the case in the latest EIA report, with Shah and Bevan expecting slightly lower injections in the East.

Bevan noted that Appalachian production has fluctuated between 33-34 Bcf/d in recent days and has failed to bounce back toward the June 5 high of 34.7 Bcf/d. Regional interstate pipeline receipts have declined by 1.2 Bcf/d since June 5, with Columbia Gas Transmission (TCO) and Equitrans Gas Transmission accounting for 0.7 Bcf/d the decline. The remainder, he said, was spread across multiple regional pipes, with Tetco only sliding 0.1 Bcf/d despite the flow restrictions.

“The TCO production weakness seems to be temporary, and they have been working their volumes higher since the 12-hour outage on June 8,” Bevan said. Late-cycle volumes rose above 6 Bcf/d on Wednesday night, “and Thursday morning’s lower look is likely going to be corrected higher with the evening flows.”

Meanwhile, Tetco’s production volumes began to decline in late May because of the PHMSA order. Volumes declined from nearly 4.1 Bcf/d to a recent low of under 3.8 Bcf/d, according to Bevan. “They were able to ramp those volumes between June 4-8 due to high Zone 3 demand, but with demand declining, production is following.”

EBW was taking a cautious approach on the Tetco issue. If more news emerges that reduced line pressures could last for several months or longer, however, it said the outlet of bolstering local storage injections could become quickly exhausted. Producers may be forced to shut-in production, particularly if reduced line pressures extend through the fall shoulder season.

“As more news emerges, potentially within the next seven to 10 days, and the market internalizes the consequences, changing supply expectations could help Nymex futures higher,” EBW said.

Jackets Optional

Spot gas prices bounced back in some portions of the country Thursday as sweltering heat was set to continue, but gains were fairly moderate.

NatGasWeather said highs would continue reaching the mid-90s to low 100s across the central and southern United States, with the hottest conditions in Texas and the Southwest deserts. Chicago also was in store for near 90-degree temperatures.

However, the forecast for key demand markets along the East Coast was much milder, cutting sharply into demand projections.

AccuWeather said the change could be attributed to the passage of a “backdoor” cold front. While most cold fronts come in from the West or Northwest, this front is to arrive from the Northeast, or the backdoor, the forecaster said.

In some cities, the difference in temperatures is expected to be “quite noticeable,” especially considering the heat wave that hit the region this week, according to AccuWeather. For example, Boston high temperatures were at or above 90 degrees every day from Saturday through Wednesday. They are expected to top out only in the mid-70s on Thursday. By Friday, even lower temperatures are expected.

“It will feel downright chilly in many Eastern cities on Friday afternoon, with considerable cloudiness and temperatures no higher than the upper 60s,” AccuWeather senior meteorologist Carl Babinski said.

The cooler outlook sent spot gas prices across Appalachia tumbling. Tenn Zone 4 200L fell 13.0 cents to $2.625. In the Northeast, Algonquin Citygate plunged 28.0 cents to $2.340.

Meanwhile, the heat in Texas boosted Katy prices by a dime to $3.115.

Most other pricing locations in the central part of the country shifted only a few cents in either direction. Henry Hub slipped a penny to $3.090.

Some markets on the West Coast posted slightly stronger increases. Southern Border, PG&E next-day gas climbed 8.0 cents to $2.950. El Paso Bondad cash was up 8.5 cents to $2.890.

In Western Canada, Alliance (APC)-ATP jumped 19.5 cents to $3.335.

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