Physical natural gas for Tuesday delivery was up smartly in Monday's trading, while next-day power prices faded. The NGI Daily Spot Gas Average was up 7 cents at $2.49, and weather forecasts in major population centers called for temperatures about 10 degrees above seasonal norms.
Futures managed a stout gain, and at the close October had added 6.5 cents to $2.758, and November was up 6.1 cents to $2.828. October crude oil shed 63 cents to $44.00/bbl.
On the West Coast, next-day gas prices rose in spite of lower power loads.
"Loads are down, heat rates are down,” said Portland, OR-based Energy GPS President Jeff Richter. “They are down to 10.5 [MMBtu/MWh] from 15.5 last week. You are off five points, so at, say, $3 gas, you are down $15 [per MWh]. That flatlines everything, so now you are looking at baseload megawatts. Wind hasn't been blowing as much and solar is down a little bit. If those ever return you will be down to a 9.5 heat rate.
"Days are getting short and it's going to take a significant weather event to even move the needle now.”
Next-day gas prices at California points rose as heat rates fell from last week. Next-day gas at Malin added 4 cents to $2.70, and deliveries to PG&E Citygate added 2 cents to $3.13. Gas at the SoCal Citygate rose a nickel to $2.98, and deliveries to El Paso S. Mainline/N. Baja added 4 cents to $2.79.
Other market points firmed as well. Gas at the Chicago Citygate added 7 cents to $2.75, and deliveries of the Henry Hub were quoted 4 cents higher at $2.70. Gas at El Paso Permian came in 5 cents higher at $2.58, and gas at Opal changed hands six cents higher at $2.63.
Having been unable to break below $2.65, futures traders sense the next move might be higher. "There are guys here thinking the next move might be to the upside," a New York floor trader told NGI. "I think we might have bottomed out here as well, and maybe we test $2.90 before we test $2.65. If anything I'm looking for a 15-cent move to the upside rather than the downside."
Risk managers are also sensing a rally in gas prices based on the assumption of declining production.
"Over the short term, it is difficult to make a case for the gas market to have a substantial move in either direction," said DEVO Capital President Mike DeVooght in a weekend note to clients. "But in our opinion, the gas market could be setting up for a substantial rally. Demand and production for natural gas has been steady, but we feel that we are going to see declines in production.
“It has been our thought that higher oil prices over the past three to four years have been subsidizing natural gas drilling activity. With current oil and natural gas prices, we could see a substantial decline in natural gas production over the next six to 12 months. It will not take a very significant decline in production to drive natural gas prices higher. There is a large short speculative position (that has been in place for the past couple years) that could be forced to cover if gas prices start to rally."
DeVooght, based in Denver, is currently standing aside the market awaiting an opportune time for an entry on the long side.
In the near term, others see less of a price advance than price stabilization.
"To be sure, even if the industry replicates last year's refill pace, working gas in storage at the end of October would fall short of the 4 Tcf mark -- the level likely required to reset prices lower," said BNP Paribas' Teri Viswanath, director of natural gas strategy. "As late as last month, the market consensus held that the industry would most likely top 4 Tcf -- a presumption supported by injections running 20% higher than the five-year average during the first four months of the season. Consequently, ample storage capacity still available to store excess supplies should prevent an exaggerated sell-off as the industry winds down the injection season," she said in a Friday note.
Energy weather trader Bespoke Weather Services saw little change in weather patterns over the weekend. "Weather guidance remained relatively neutral over the weekend, with some bearish trends in the medium term and some bullish trends in the longer term, leading us to believe there will not be any significant weather-driven changes in prices through the week," the firm said in a weekend note to clients.
Global Forecast System (GFS) guidance for the United States “has a relatively zonal pattern in the medium and long term, indicating that weather will be relatively warm but not a significant demand driver into the end of the month. GFS operational guidance has begun to show a cold snap by day 13 that would significantly spike early season heating demand, but we see little evidence that this is anything more than a fantasy."