Natural gas prices for the first week of the traditional heating season made something of a curious entrance. All but two market points followed by NGI posted losses of about a nickel to a dime outside the Northeast. For the week ended Nov. 6 the NGI Weekly Spot Gas Average plummeted 21 cents to $1.95, and whereas for the previous week all regions posted a $2 handle, this week all regions except California and the Midwest posted a $1 handle.
The market point showing the week's greatest gain was FGT Citygate with a rise of 30 cents to $2.65 on limited trading, and the week's biggest loser was the Algonquin Citygate with a drop of $2.04 to $3.99.
The Millennium East Pool recorded its lowest weekly average ever at 81 cents, 7 cents lower than the previous weekly low posted a month earlier. Several Marcellus points also came within a few pennies of their weekly settlement lows.
Regionally, the Northeast was sacked for the week's biggest loss, falling 50 cents to $1.66, and California fared the best, with a modest 4-cent drop to $2.28.
The Midwest retreated 22 cents to $2.14 and the Midcontinent fared nominally better with a 17 cent decline to $1.96.
East Texas came in with a 12-cent loss to $1.96, and South Louisiana skidded a dime to $1.97.
South Texas was 9 cents lower at $1.97, and the Rocky Mountains gave up 8 cents to $1.98.
In what could be a sign of things to come, December futures gained 5 cents to $2.371 and that rise was enough to snatch the market from the jaws of what looked to be a losing week at the close of trading Wednesday. The Energy Information Administration (EIA) reported a smallish build of 52 Bcf, about 7 Bcf less than trader expectations, and prices stormed to a double digit gain. At the close, December settled higher by 10.2 cents to $2.364 and January had added 9.4 cents to $2.539.
"The December, January, February, and March contracts were all up between 9 and 10 cents,” a New York floor trader told NGI. “There was lots of outright buying. None of this wimpy spread trading, buying and selling something against it. There was no risk-aversion. This was a risk-on trade."
Going into the storage report with little in the way of heavy heating demand on the horizon, the consensus was leaning toward storage builds well past the October end of the injection season. Tim Evans of Citi Futures Perspective calculated a 69 Bcf increase for the week ended Oct. 30, somewhat above consensus figures in the high 50 Bcf area, but Evans was also looking at builds for the next three weeks.
Storage is currently at 3,929 Bcf, tied for the record set previously in October 2012, and if his estimates are correct, by the third week in November storage will be at a record 4+ Tcf.
Others stretch it even further. John Sodergreen, editor of Energy Metro Desk, said, "The way things are currently going, we will be very close to seeing a build in December (of all things); the weather gods are suggesting things are getting nippy (finally) in key areas, but from our vantage, the December build anomaly may be more than possible."
Last year, 90 Bcf was injected and the five-year pace stands at 58 Bcf. PIRA was estimating a 57 Bcf increase, and industry consultant Genscape was calling for a 61 Bcf build. A Reuters survey of 23 traders and analysts revealed a sample mean of 59 Bcf with a range of 52 to 69 Bcf.
Although storage is at a record, analysts see somewhat of a "tightening" market. "The 52-Bcf net injection into natural gas storage for last week was the third consecutive bullish-side miss, suggesting either a tightening trend in the background supply/demand balance, or perhaps some difficulty in matching production flows with available remaining storage capacity. In any case, the market looks somewhat less oversupplied, a constructive development," Evans said.
In spite of the strong market finish, the argument that the risk this time of year is for leaner builds and (presumably) higher prices is not resonating well in all corners. "We're not buying it this year. Our consensus came in at 57 Bcf for this week's report and the survey index came in at 58 Bcf. The spread between the three categories we track was tight at 1 Bcf. As we noted, the editor sees a little high-side risk, but not much. The 58-61 Bcf tight range should be the game this week," Sodergreen said.
Current inventories are 371 Bcf greater than last year and 147 Bcf more than the five-year average. In the East Region 32 Bcf was injected, and the West Region saw inventories increase by 4 Bcf. Stocks in the Producing Region rose by 16 Bcf.
The EIA also announced Thursday that it would begin issuing the newly formatted (5-Region) weekly Natural Gas Storage Report on Nov. 19. (See Daily GPI, Sept 30).
Analysts are seeing a deeply oversold market and one that is ripe for rebound, especially by the second half of 2016. "There is no arguing against what mild weather is failing to do for the demand side of the ledger this November," analyst Breanne Dougherty of Societe Generale in New York said in a recent report. "The current weather outlook has resulted heating loads trending near the bottom of the five-year range; and although the historical storage record did not get breached by end October, that happening imminently is pretty much a certainty. This should keep a decent cap on any upside price movement over the next few weeks.
"That being said, we continue to see the market as heavily 'oversold,' which brings upside price risk to winter 2015-2016 contracts in particular as the market progresses into core winter. Most importantly, however, confidence in our constructive 2H2016 and beyond price view rises with every day Cal 16 stays under $2.75/MMBtu. Producers are feeling the pinch, 3Q2015 results highlight the likelihood of further capex reductions.
"Beyond winter 2015/2016, the knock-on effect of a sustained sub-$3/MMBtu price environment, which the market has now been in for some while, should not be overlooked. Our 2016-2017 outlook remains focused on the structural undercurrents [of] reduced producer investment becoming increasingly certain, which will translate into a stagnant near - term production trajectory and, firming baseload (non-weather dependent) demand will inevitably strengthen that side of the ledger. Our view is for bearish sentiment (albeit stable/stronger prices than the current curve) to dominate through 1H2016 in anything other than a sustained cold winter 2015/2016 scenario; but the above mentioned structural undercurrents should start translating into fundamental data points in summer 2016, supporting our particularly more constructive price view for 2H2016 and beyond."
Societe Generale forecasts a Q3 Henry Hub price of $3.12 versus current Nymex quotes at about $2.63. Q2 Henry Hub is forecast at $2.62.
In Friday's trading physical natural gas for weekend and Monday delivery managed a small advance as outsized gains in the East overshadowed hefty declines in the Midwest and California.
The NGI National Spot Gas Average added 2 cents to $2.03, and eastern points on average added close to 40 cents. December futures added 0.7 cent to $2.371 in lackluster trading, and January shed 0.7 cent to $2.532.
In the more immediate term, traders are looking for the market to hold recent gains but are anticipating an opportunity to go short about another 15 cents higher. "Although this market has swung on both sides of yesterday's close overnight, we are expecting a steady-strong finish to this week's trade as it would appear that some structural shifts are developing in downsizing recent weekly storage injections," said Jim Ritterbusch of Ritterbusch and Associates in a Friday morning note to clients.
"[Thursday's] 52 Bcf injection was much below industry ideas, especially ours, in furthering a string of several downside misses that are helping to offset the impact of mild fall conditions. While the storage increase that was less than the five-year average hike of 58 Bcf takes a 4.1 Tcf supply peak off of the table, a record supply north of 4 Tcf is still a near certainty given yesterday's lift to the 3.929 Bcf level."
Ritterbusch believes that "yesterday's strong price advance of almost 4.5% will prove sustainable going forward but in erratic fashion as the market responds to daily updates to the short term temperature views. For now, above-normal temperature outlooks, especially across the upper Midwest, are still favoring unseasonably mild conditions with some outlooks beginning to stretch through the third week of this month.
"We are maintaining our expectation for an advance in nearby futures up into the $2.45-2.50 zone where we will look to re-establish short holdings in anticipation of a return to this month's lows of about $2.18 that were established a week ago."
In the physical market, Midwest quotes slid about a dime. Gas on Alliance was seen 9 cents lower at $2.14, and deliveries to the Chicago Citygate fell 7 cents to $2.17. Gas on Consumers for the weekend and Monday shed a dime to $2.19, and deliveries to Michigan Consolidated were quoted 14 cents lower also at $2.18. Gas at Joliet fell 9 cents to $2.14.
Conversely, quotes at eastern points bounded higher. Gas at the Algonquin Citygate changed hands $1.80 higher at $4.99, and deliveries to Tenn Zone 6 200L vaulted $1.20 to $3.84.
In the Marcellus gas on Dominion South rose 8 cents to $1.06, and deliveries to Tennessee Zn 4 Marcellus were quoted at 78 cents, unchanged. Gas on Transco-Leidy Line added a penny to 88 cents.
Gas buyers across the PJM footprint looking for supplies to fuel gas generation will have some renewable generation over the weekend to work with. WSI Corp. in its Friday morning report said, "A storm system and its associated cold front will push across the power pool [Friday] with a round of showers and perhaps a few thunderstorms. It will be windy and mild along with a touch of humidity. Highs will range in the 60s and 70s, warmest east.
"A gusty southwest-to-northwest wind associated with the storm system will drive strong wind generation today. Output will peak as high as 5 GW. Wind gen will likely subside and become light during the weekend into the start of next week."
Thursday's hefty storage build of 52 Bcf is likely to get a replay next week as the National Weather Service (NWS) forecasts a much below normal accumulation of heating degree days (HDD) in major energy markets. For the week ended Nov. 7, NWS predicts New England will see a relatively light 79 HDD, or 65 below normal, and the Mid-Atlantic will have to endure 57 HDD or a whopping 73 HDDs below normal. The greater Midwest from Ohio to Wisconsin is expected to have just 56 HDD, or 89 below normal.