After failing to sustain earlier decreases during the prior trading session, natural gas futures resumed their slide on Tuesday as two major weather models pointed to easing heat in the coming weeks. The September Nymex gas futures contract plunged 57.7 cents to $7.706/MMBtu. October futures tumbled 56.2 cents to $7.698.
At A Glance:
- Cooler weather possible by mid-month
- Can production hold above 97 Bcf/d?
- Southeast cash down, but still at sharp premium
Spot gas prices tacked on more losses even as 90-degree temperatures took hold across most of the country. NGI’s Spot Gas National Avg. fell 33.0 cents to $7.810.
With stifling heat and record temperatures now stretching into a third month, price action along the futures curve has been increasingly driven by what the latest forecasts show. Until now, there’s been little optimism that the oppressive heat that marked June and July would end. However, both the American and European models on Tuesday showed slightly less intense heat by mid-August.
NatGasWeather said the Global Forecast System (GFS) lost 5-6 cooling degree days (CDD) overnight as weak weather systems find flaws in the hot upper ridge late next week into the third week of August. The forecaster noted that the outlook remains “plenty hot” for most of the next 15 days.
In addition, the GFS is significantly hotter than the European model, especially for the eight- to 15-day period. NatGasWeather said the European data also trended cooler by five CDDs, particularly around the Great Lakes and East during the Aug. 10-15 period. This is “an important difference that needs resolving,” according to the firm.
Instead, though, the midday GFS added back 4-5 CDDs. It was, however, “a touch cooler” across the East Aug. 13-16, NatGasWeather said. The biggest difference between the two models is the cooling reflected around mid-August in the European data for the Great Lakes and East.
Sustaining Supply?
Production also has been topical. The market has lasered in on output to see whether recent highs can sustain momentum, or they fall victim to pipeline and field maintenance activities that have routinely dragged down production since the spring.
Production data is typically unreliable at the start of a month, with early day readings often revised higher in the afternoon. That was the case on Monday when production was reportedly off about 1.5 Bcf day/day from the 97 Bcf highs seen over the weekend. Tuesday’s data also showed a drop in the morning.
“If production consistently increases over 98 Bcf/d, hotter-than-normal weather patterns are going to be required into fall to counter,” NatGasWeather said. “Cooler overnight trends could disappoint.”
Mobius Risk Group said dry gas production has been more resilient in recent weeks, showing signs that sequential growth could be a consistent theme by year end. However, elevated demand continues to counter all advances from the supply side.
“Were it not for the Freeport LNG outage, the demand side of the North American supply/demand equation would likely be setting records in a $7.00-plus pricing environment,” Mobius said.
Freeport was shuttered in early June following a fire, stripping 2 Bcf/d of demand that would have made its way to the liquefied natural gas export facility on Quintana Island, TX.
Strength in summer demand is an important factor to consider as forward pricing beyond the upcoming winter withdrawal is below where coal prices are currently pegged, according to Mobius. Theoretically, the market could see “significant coal-to-gas switching unless the natural gas curve continues to roll up in the front, or coal prices materially decline by early spring 2023,” it said.
Lower Southeast Cash Prices
Searing heat across much of the Lower 48 did little to stem losses on Tuesday. In fact, the largest price decreases occurred in the Southeast, where high temperatures continued to keep pipelines running full in order to meet demand.
Transco Zone 5 next-day gas plunged $2.350 day/day to average $10.200. Notably, this still is a stark premium over the benchmark Henry Hub, which averaged $7.975 for Wednesday’s gas day.
Southern Natural dropped $2.120 on the day to average $9.945, while Transco Zone 3 fell $1.905 to $10.075.
RBN Energy LLC managing editor Sheetal Nasta said beyond the strong demand related to the prolonged stretch of heat, the price premiums in the Southeast also are because of constraints on Transcontinental Gas Pipe Line Co. (Transco). To be sure, the pipeline has posted several operational notices in recent weeks as it contends with the added deliveries on its system.
Limited access to supply and constraints on Transco, the primary system delivering gas to the Southeast, have created a demand “island” in the Mid-Atlantic and Southeast as persistent heatwaves boosted cooling demand, according to Nasta. Moreover, without additional pipeline capacity, the dynamics unfolding this summer could become a regular feature of the Southeast/Mid-Atlantic markets.
“These kinds of price disruptions are not uncommon in the Northeast during the winter when demand and volatility peak,” Nasta said. She noted, however, that Appalachian supply abundance and the buildout of pipeline capacity has dampened the frequency and extent of those disruptions.
“But double-digit prices in the summer, and this far south? Not so much.”
Nasta said structural changes to power generation capacity, including gas plant additions and coal plant retirements, in the Mid-Atlantic/Southeast over the past decade have increased gas demand for baseload power generation. At the same time, incremental gas molecules have been harder to come by because of limited pipeline capacity and constraints on the capacity that exists.
These markets, Nasta said, fall outside of the Northeast supply area, and pipeline expansions there have been exceptionally challenging. “Transco is the only legacy long-haul pipeline moving gas in this direction, and expanding or building new transportation capacity, particularly in and around Washington DC, is a nonstarter,” she said.
Williams CEO Alan Armstrong also noted the robust volumes flowing on Transco during the second quarter earnings call Tuesday. He said Transco experienced a “three-day peak summer delivery” in early July and continues to “see weather-driven demand for cooling.”
Extensive losses spread across the East Coast as well. PNGTS cash dropped $2.000 to average $11.350 for Wednesday’s gas day. However, other regional declines were more tempered at less than 40.0 cents on the day.
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August 03, 2022 at 04:45AM
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Natural Gas Futures Fall as Heat Seen Easing; Southeast Leads Cash Declines - Natural Gas Intelligence
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