Capping off an extremely volatile week, natural gas futures recovered from the prior’s day modest downturn. With support from increased heat in the near-term outlook, the September Nymex gas futures contract on Friday finished 2.1 cents higher at $3.851.
At A Glance:
- Heat seen returning to Lower 48
- Wind generation behind bearish EIA data
- Cash snaps losing streak
Spot gas also finally snapped a multi-day losing streak, with most U.S. pricing hubs picking up between a dime and 20.0 cents. However, with the West and East coasts continuing to decline, NGI’s Spot Gas National Avg. picked up only 5.0 cents to hit $3.775.
After looking a bit cooler for late August, weather models flipped in a big way on Friday. Once the coolest of the datasets, the European 15-day outlook gained about 12 gas-weighted degree days (GWDD) because of hotter changes seen in the eastern half of the nation. The La Niña base state remains intact, which, especially in the back half of summer, correlates to above-normal heat, according to Bespoke Weather Services. This appears to be the main driver of the changes, which put the final week of August now close to a weekly record in terms of GWDDs for those dates.
Maxar’s Weather Desk said weather models still showed a cooler air mass migrating through the Midwest and East by around next Friday (Aug. 27). However, it is now expected to carry temperatures that are closer to normal as opposed to the previous outlook for slightly below-normal temperatures.
The warmer outlook may portend a tightening of supply/demand balances that appeared to loosen quite a bit based on the latest government storage data. The Energy Information Administration (EIA) on Thursday said inventories for the week ending Aug. 13 rose by a plump 42 Bcf, but a reclassification lifted stocks by another 4 Bcf to result in a net addition of 46 Bcf.
Total working gas in storage reached 2,822 Bcf for the period, 547 Bcf below year-ago levels and 174 Bcf below the five-year average, according to EIA.
Wood Mackenzie natural gas analyst Eric Fell said the reference period in the latest EIA report was the first loose week since the week ending Jun 10. It ended a streak of eight in a row of weather-adjusted tightness versus the five year average, which largely corresponded with nuclear/renewable generation coming in much lower than expected.
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The latest injection, according to Fell, “is a warning to those who assumed that the tightness over the previous eight weeks was ‘structural’ and didn’t realize that unusually low renewable generation was a major driver (something we have pointed out repeatedly).”
Wind, in particular, is a transient factor and was not likely to remain far below normal over the balance of summer, Fell said. The analyst noted that wind during the EIA reference week increased by a massive 27 average gigawatt hours — the largest weekly increase in Wood Mackenzie’s data set.
In addition, there also was a roughly 1 Bcf/d increase in net supply, with both production increasing and net exports declining week/week, according to Fell.
Tightening Balances
Looking ahead, export demand is expected to fully recover once maintenance events taking place at various U.S. liquefied natural gas (LNG) terminals are completed. Furthermore, two LNG production units are expected to begin service in the coming months, lifting export demand beyond prior record levels.
On the supply front, there were mixed views as to how much production growth the market could see. Fell said output already may be growing a bit more than what’s obvious to the market. He noted that the error in Wood Mackenzie’s supply/demand storage model versus what has been reported by the EIA has grown significantly in recent weeks. He attributed the large discrepancy to production growth that is hidden behind intrastate pipeline systems.
EBW Analytics Group, however, said the market is relying heavily on previously drilled but uncompleted (DUC) wells to achieve even the modicum of supply growth it has experienced since the spring. In the latest Drilling Productivity Report, the EIA pegged average monthly growth in the Lower 48 oil and gas basins at only 0.12 Bcf/d from May to September.
Nationally, producers are completing an average of 273 more wells than newly drilled over the past three months, accounting for 34% of total well completions from January-July, according to EIA. In oil plays beyond the Permian Basin, DUCs are an even larger percentage of total completions.
“DUCs are not a sustainable resource,” EBW analysts said. “Once the inventory of previously drilled wells runs low, producers will either have to increase drilling rates or complete fewer wells. With current capital limitations for producers and repeated pledges to turn from increasing production to a focus on profits, this appears highly unlikely — implying downside risks to oil and associated gas production.”
While there may be some bearish weeks preceding the upcoming winter in the form of more mild weather and potential storm activity, EBW analysts said the market’s focus on what could be a “perilous storage situation” may return to the forefront by the end of September. Gas-to-coal switching capacity is largely exhausted, and a potential price ceiling of shutting in LNG exports could shoot price gains to north of $10.
The EBW team said potentially explosive upside price risks remain in a bullish scenario. Bearish risks, while still significant at maybe $1.00-1.50 in an ultra-warm warm winter scenario, remain far smaller.
“Increasing market recognition of this risk/reward imbalance — with significant potential upside set against $1.00-1.50 of downside — suggests that a risk-weighted pricing for natural gas should be far higher than the current Nymex winter strip.”
Not So Fast, Summer
Just as cooler weather was starting to make it feel like fall (everywhere but Texas, at least), temperatures are set to crank back up again in the days ahead, driving spot gas prices higher on Friday.
NatGasWeather said moderately strong national demand was forecast for the weekend as most of the southern United States remains “very warm to hot.” As upper high pressure expands to rule most of the country in the next few days, though, the heat wave could expand to the important East region. Temperatures were expected to climb into the 80s and lower 90s, driving up gas demand for power generation.
The late-season hot weather may be short lived, according to NatGasWeather. The latest data continued to favor the hot upper ridge weakening Aug. 28-Sept. 3, although up to two days slower based on the European weather model.
Meanwhile, the Northeast on Friday also was monitoring Tropical Storm Henri. The storm was expected to strengthen to hurricane status by Saturday and be near that strength when it makes landfall in southern New England by late Sunday.
New York utility Consolidated Edison Inc. said Friday it was mobilizing extra crews to respond to any outages or other service problems that may occur as Henri moves through the area. The company secured 1,200 mutual aid workers to restore service to any customers that were affected by the storm. Those workers would supplement the utility’s crews.
Iroquois Zone 2 next-day gas prices jumped 9.5 cents day/day to average $3.920. In Appalachia, Columbia Gas climbed 10.0 cents to $3.645.
Cove Point spot gas tacked on 16.0 cents to average $3.940, while Henry Hub moved up 11.5 cents to $3.935.
On the pipeline front, Columbia Gulf embarked on another round of maintenance on the Shelburn and Alexandria compressor stations for the Louisiana Xpress Project (LAXP). The work would cut up to 365 MMcf/d of southbound flows until Sept. 3.
Elsewhere across the United States, Houston Ship Channel cash climbed 14.0 cents to $3.890. In the Midwest, Chicago Citygate spot gas picked up 12.0 cents to $3.770.
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August 24, 2021 at 12:05AM
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Natural Gas Futures, Cash Prices Strengthen as Temperatures Set to Warm Again - Natural Gas Intelligence
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