Natural Gas Futures Recover on First Taste of Summer, Production Drop - Natural Gas Intelligence

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Another change in the weather data, this time more supportive for gas demand, sparked a rebound in natural gas futures on Tuesday. Strong cash prices and a large dip in production aided in the rally, which resulted in the July Nymex futures contract jumping 5.8 cents to settle at $3.128. August climbed 5.1 cents to $3.140.

At A Glance:

• Production plunges more than 1 Bcf day/day
• Heat grips U.S.
• Texas nuclear outage drives gains

With heat driving up demand in key regions across the United States, including Texas, NGI’s Spot Gas National Avg. shot up 6.5 cents to $2.945.

The warmer trend in the most recent weather data essentially erased the cooler changes seen over the weekend, according to Bespoke Weather Services. It also put June back in the running for the Top Five hottest Junes on record, in terms of the national gas-weighted degree day count. The changes stem from a weaker trough into the eastern United States next week, which would reduce the amount of cooling that models had been shifting toward.

“We still see the focus of best heat, relative to normal, shifting back toward the Rockies/Plains,” said Bespoke. “But with a lack of cooler air anywhere else, the bias of the pattern remains hotter than normal, with any ‘cooler’ days essentially just being close to normal.”

In addition, Texas is finally drying out, and while there is not strong heat in the state, it is at least back at normal, “which is more impressive than has been seen there for awhile,” Bespoke said.

A line of weather systems is set to arrive on the East Coast by the end of the week, lowering temperatures back to more seasonal levels, but the West should see heat return. Maxar’s Weather Desk said a ridge is forecast to build over the region in the next six to 10 days. Daytime highs in this period are likely to reach the 100s in parts of Utah, Nevada and Arizona, which would be well above normal for this time of year.

Hotter trends also are expected in Texas, where conditions are drier than normal despite the torrential downpours of the past few weeks.

“However, the models point to increased storminess along the Gulf Coast late,” Maxar’s said of the 10-day outlook. “Below-normal temperatures in the East are associated with onshore flow early and a trough settling in during the second half.”

Constructive Export View

Outside of weather demand, liquefied natural gas (LNG) feed gas took another hit as maintenance season hits its summer peak. NGI data showed gas deliveries to U.S. terminals sitting at around 8.8 Bcf on Tuesday.

The drop, however, is widely viewed as temporary given the reductions coincide with the turnarounds taking place at various U.S. facilities.

Furthermore, high global gas prices have paved the way for strong export demand throughout the summer as stockpiles in Asia and Europe remain below normal two months into the traditional injection season.

Energy Aspects said it now expects smaller year/year increments in Europe’s LNG receipts over the rest of the injection cycle despite U.S. exports running at maximum capacity. This would make it even harder for the continent to reach storage adequacy by end-October, leading the firm’s analysts to posit that more gas may be priced out of the European power market than is currently reflected on the curve.

That view is supported by a heavy slate of supply-side maintenance and underperformance, as well as by upward adjustments to demand driven by China, namely industrial demand and hot weather, according to Energy Aspects. Demand is also higher in South Korea because of voluntary coal-fired capacity restrictions that are stoking demand. Consumption also is higher in Latin America because of the Brazilian drought and declining Vaca Muerta production in Argentina.

Despite the constructive view, “there is no room for upward adjustment in our U.S. injection season LNG export estimates,” Energy Aspects noted. The “95% capacity utilization estimate is quite high, while paying heed to necessary time offline for maintenance and some assumption of storm-related downtime.But it does suggest that U.S. exporters will continue to load cargoes quickly and efficiently and minimize downtime.”

Similar to May, the firm expects June comparisons against recent historical stock building to be light. This is partly because of the year/year growth in LNG export capacity.

“Per our weekly balances, assuming the current weather forecast and 10-year normal thereafter, June’s projected 7.9 bcf/d injection rate would still fall notably below the 12.5 Bcf/d prior three-year average,” Energy Aspects said.

Consistently tight balances driven by heat would likely spur the market to find the higher price needed to back off sufficient gas in power to ensure storage adequacy, according to the firm. However, it also would put a tremendous onus on production coming in line with expectations.

In a note to clients on Tuesday, EBW Analytics Group compared the year/year tightening in U.S. LNG feed gas demand minus increasing production with year-ago depressed levels. These two components are set to tighten by an average 3.7 Bcf/d (443 Bcf) year/year through September.

“At our most-likely scenario projection of 10.5 Bcf/d, LNG feed gas demand is set to grow an average of 6.1 Bcf/d over the next 16 weeks,” EBW said.

Meanwhile, year/year gas production gains are expected to diminish from 3.9 Bcf/d higher in June to under 2.0 Bcf/d higher in August, according to the firm. Last year, production grew sharply as shut-in supply was restarted, but EBW is currently projecting only “tiny” gains in production in August this year.

“As year/year core fundamentals tighten through August, it may lay the groundwork for another leg higher in Nymex futures,” EBW said.

On the supply front, Wood Mackenzie said production data showed a 1.2 Bcf/d decline day/day in the Northeast. Two maintenance events are cutting flows in the region — pigging on Columbia Gas Transmission (TCO) and compressor station maintenance on Equitrans Transmission. Both events were scheduled to last through Thursday.

Given the temporary nature of the pipeline events, and subsequent drops in production, output could rebound back to 92 Bcf by the end of the week.

NatGasWeather said gas price strength along the Nymex strip likely has more to do with hot temperatures over Texas and surrounding states the next few days since other elements haven’t been as favorable. The firm is looking to see whether Tuesday’s gains are able to hold and whether the afternoon European model remains a little hotter than the American model for June 15-20. “Although it would likely need to add a few cooling degree days over the East to be considered bullish for this important period.”

Soaring Spot Gas

Sweltering conditions combined with pipeline maintenance events and an unexpected drop in nuclear output to lift spot gas prices across most of the country. The only exceptions were on the East and West coasts, which experienced a pullback in prices as several weather systems brought rain to those regions.

In the Northeast, Tenn Zone 5 200L plunged 17.0 cents day/day to average $2.745. In California, SoCal Citygate was down 11.5 cents to $3.635.

That’s where most meaningful cash price declines stopped. The rest of the country remained on its upward trajectory amid hot temperatures in the 90s and 100s, including in Texas. The Lone Star State has largely escaped intimidating heat so far this summer. Instead, it’s been plagued by a series of thunderstorms that have produced several inches of rain in as little as one day.

With the heat finally taking hold, the unexpected outage of the Comanche Peak nuclear reactor in South Texas stoked markets. The nuclear facility went offline late Monday following a turbine trip because of a fault and fire on the unit’s main transformer. The plant remained in hot standby mode early Tuesday. No injuries were reported in the fire, which is under investigation by the Nuclear Regulatory Commission.

As for gas prices, Texas Eastern S. TX next-day gas climbed 4.0 cents to $3.110. In West Texas, Waha cash shot up 50.0 cents to $2.780.

The Energy Information Administration (EIA) on Tuesday noted the numerous pipelines that have begun operations since last fall in the Permian Basin. These pipelines have not only allowed for improved connectivity to demand markets but also have tightened up basis prices at the Waha Hub.

The Permian Highway Pipeline, Agua Blanca Expansion, Villa de Reyes-Aguascalientes-Guadalajara and the Samalayuca-Sásabe systems have contributed to a nearly 10% increase in U.S. pipeline exports to Mexico since last March, according to EIA.

Over the past few years, constrained takeaway capacity in the Permian kept Waha prices consistently at $1.00 or more below Henry Hub. However, that began to change in late October. From March through May, Waha has averaged only 22 cents back of Henry Hub. This period includes a record high for Waha amid the February cold snap in Texas.

Henry Hub on Tuesday averaged $3.105, a 32.5-cent premium to Waha.

Elsewhere across the country, Chicago Citygate inched up 4.5 cents to $3.060, and NGPL Midcontinent tacked on 17.0 cents to $2.850.

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