Natural gas futures fell Tuesday despite mounting weather-driven demand and sliding production. Broader market concerns about inflation and panic in the financial sector helped slow momentum.
At A Glance:
- Forecasts call for more cold ahead
- SoCalGas indicates Line 235 revival
- Financial system stress looms large
The April Nymex natural gas futures contract shed 3.3 cents day/day and settled at $2.573/MMBtu. May futures fell 3.6 cents to $2.690.
The prompt month had rallied 17.6 cents in Monday’s session.
NGI’s Spot Gas National Avg. ticked down 2.5 cents to $2.865. Prices varied by region. Cash prices had popped 28.0 cents a day earlier.
Spot prices could ease further in coming days following a message from Southern California Gas (SoCalGas) on its electronic bulletin board. SoGalGas indicated available firm capacity on Transwestern-Needles would return on Thursday (March 18) to 816,000 Dth.
SoCalGas in February said a safety-related pressure reduction was necessary on its Line 235. It cut receipts from Transwestern-Needles by nearly 0.5 Bcf/d. This shut in the receipt point and effectively offset the capacity that returned with the revival of El Paso Natural Gas Pipeline’s (EPNG) Line 2020 days earlier.
The combination of the two reductions had left California supplies precarious and prices in the state relatively high. Reduced volumes on the EPNG conduit had forced Southern California utilities to draw heavily from storage to meet demand.
“Total scheduled quantities for the entire SoCalGas system averaged 2.74 Bcf/d from Jan. 1 to Feb 15,” said NGI’s Josiah Clinedinst, markets analyst. “After the unplanned maintenance shutdown of Line 235, the average daily flows for the entire system, from Feb. 16 to March 14, averaged 2.58 Bcf/d. That is an average daily deficit of 5.99% of natural gas flows because of the temporary shutdown.”
Bigger picture, production on Tuesday declined from 100 Bcf/d to 98 Bcf/d, according to Bloomberg, slowed by short-term maintenance projects.
At the same time, forecasts from the National Weather Service (NWS) continued to show increased heating demand in the second half of March and into the first week of April. Its projections showed multiple bouts of snow and freezing temperatures spanning large swaths of the Lower 48 this week and next.
If the outlook proves accurate, it could mark a rare bullish stretch of a winter that otherwise had been mostly mild, said StoneX Financial Inc.’s Thomas Saal, senior vice president of energy. He told NGI the late-season chills could bolster demand enough to boost storage withdrawals and tighten inventories relative to historic averages.
That noted, Saal said spring weather is around the corner. Supplies in storage outside of the West are bound to emerge from the withdrawal season at stout levels. This has weighed on futures and left market speculators with net short positions in March, he said.
“We simply have plenty of gas in inventory,” he said.
The Energy Information Administration (EIA) reported an 84 Bcf withdrawal from natural gas storage for the week ended March 3. Inventories stood at 2,030 Bcf — 493 Bcf above year-earlier levels and 359 Bcf above the five-year average. The five-year average was a decline of 101 Bcf.
Looking ahead to Thursday’s EIA result for the week ended March 10, NGI modeled a withdrawal of 64 Bcf. The median of a preliminary Bloomberg poll landed at the same expected print. Early survey results overall spanned draws of 42 Bcf to 120 Bcf. The five-year average for the period is a pull of 77 Bcf.
However, further out, analysts are anticipating EIA reports covering the second half of March will show relatively robust draws, given the anticipated weather and strength in demand for U.S. gas exports. “That’s bound to lend some price support” in coming sessions, Saal said.
He also noted the Freeport LNG facility in Texas, shuttered last summer after an explosion and fire, is working in earnest to build back to nearly 2.4 Bcf/d of capacity this spring. This process is contributing to demand for domestic gas now and is expected to continue through the coming shoulder season, creating another bullish factor.
Demand from U.S. liquefied natural gas export plants topped 13.0 Bcf/d early this week, up 1 Bcf/d from last week. Both Asia and Europe are expected to continue calling for U.S. supplies of the super-chilled fuel this year and beyond, given limited domestic supplies on both continents. Russia’s war in Ukraine amplified matters in Europe after the Kremlin cut off much of the gas it sent to the continent via pipeline in retaliation of Western sanctions.
“No question,” Saal said, Freeport “is a positive for prices.”
Bank Failures, Stubborn Inflation
Economic and financial news, however, cast a cloud of uncertainty over markets this week, minimizing trading and working against a continued rally in natural gas prices.
Lofty inflation, a major challenge for the U.S. economy since early 2022, eased slightly in February but remained elevated, a new federal report showed Tuesday.
The Labor Department’s Consumer Price Index rose 6% in February from a year earlier. That was down modestly from the 6.4% gain the previous month and the slowest pace since September 2021. However, inflation remained three times as high as Federal Reserve Bank (Fed) policymakers say is healthy.
Saal said persistent inflation ultimately makes natural gas production more expensive, and if costs remain high, output could decline more notably later this year. That would be bullish for prices, but it could also prove detrimental for the economy and, by extension, energy demand.
“I’m not in the inflation camp just yet,” Saal said, noting strength in the job market. “But if there is a recession, that’s obviously a negative.”
The latest inflation news comes as the Fed and other regulators try to sort out the depths of potential problems linked to a pair of regional bank failures in recent days that crushed financial stocks late last week and again Monday before some recovery Tuesday.
The failures of Silicon Valley Bank in California and Signature Bank in New York – linked to risky technology start-ups and cryptocurrency deposits – could have broader implications for the financial system and economy if similar problems emerge at other lenders, analysts said in a barrage of reports. Silvergate Financial, heavy in crypto markets, also began the process of voluntarily shutting down this month.
Weakness in the financial sector could dampen confidence and force banks to scale back lending, hurting energy companies’ and others’ ability to finance projects. A dubious outlook reigns at the moment, as long-term fallout “will depend on how the current crisis evolves over time,” said Raymond James Financial Inc.’s Larry Adam, chief investment officer.
Cash Prices Vary
Spot gas prices were uneven on Tuesday, with gains in the West and parts of the South but losses in several other regions.
SoCal Citygate gained 97.0 cents day/day to average $7.490, while Opal in the Rockies jumped 31.0 cents to $5.780.
Henry Hub tacked on 18.5 cents to $2.630.
NWS data showed weather systems pushing from the West across the Lower 48 Tuesday and into Wednesday, forcing out mild temperatures and ushering in seasonally cold air. Low temperatures from around zero to the 30 were forecast for expanses of the central United States. A major snowstorm with frosty temperatures, meanwhile, reached the Northeast Tuesday and was expected to impact the region into Wednesday.
Another round of wintry weather was forecast for this weekend into next Monday, according to NWS data. Chilly conditions were expected to persist deep into the month and into early April, creating strong heating demand for this time of year.
Prices in the Midwest and Northeast, however, retreated Tuesday. Algonquin Citygate shed $1.220 to $3.015, while Chicago Citygate fell 8.5 cents to $2.465.
The shifting weather, particularly in the Northeast, could change the price picture quickly.
AccuWeather meteorologists said the storm impacting the Northeast this week could deliver everything from ferocious winds to heavy snow to flooding rains. They expected it to affect major markets from New England to parts of the Mid-Atlantic.
For much of the winter, relatively mild weather has canvassed the Northeast, so the shift could get furnaces cranking, AccuWeather chief meteorologist Jonathan Porter said.
In addition to winter storms in New England, strong winds from 40-50 mph were projected to blast parts of Appalachia, Virginia, Maryland, Pennsylvania and New York with cold air, he said.
“The early-week nor’easter will be especially notable since it is the first such storm of the season bringing widespread significant impacts in a season which has to date been remarkably warm and devoid of snow,” Porter said.
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