Physical natural gas for Wednesday delivery, on average, gained ground in Tuesday's trading as supportive power prices and forecasts of increased power demand provided a firm foundation to make power generation purchases.
The NGI National Daily Spot Gas Average rose 3 cents to $1.67, but gains in the East averaged more than 20 cents. Soft pricing in the Gulf Coast and Midwest was outdistanced by gains in the Rockies, California and the East. Futures continued to sink, posting another multi-year low as January retreated 7.2 cents to $1.822 and February shed 7.3 cents to $1.886. January crude oil gained $1.04 to $37.35/bbl.
Analysts see formidable challenges ahead as the industry confronts burdensome inventories and seemingly few options to relieve a chronic oversupply situation. Teri Viswanath, director of commodity strategy at BNP Paribas cited moderate El Nino driven temperature forecasts as stunting natural gas demand. Reduced weather-related demand and strong production growth has led to some curtailments by producers, "but we still have very, very strong production on the pipes right now.
"Based on our current estimate, we think the industry withdraws just 1.74 Tcf of stored gas this winter. That compares with 2.18 Tcf five-year average and that's going to leave roughly 2.2-2.3 Tcf in the ground by end of March."
The high carry-out inventory levels toward next spring "implies to us a few visible challenges to industry of excess supplies," she said.
The forecast mirrors some analysts' views over the past couple of weeks, which point to gas prices not strengthening through next year because of an oversupply (see Daily GPI, Dec. 11).
Unlike 2015, "there's simply fewer options to manage that imbalance," Viswanath said. "At this point, opportunities for additional power demand growth are nearly exhausted. In the absence of extremely hot weather, we see little room for increased power demand in 2016. We do not see additional demand growth out of that sector..."
The failure of prices to strengthen has some calling for lower prices still. "[Tuesday's] downside move would appear to set the stage for additional declines to the 2001 lows of $1.76," said Jim Ritterbusch of Ritterbusch and Associates in a Tuesday morning report to clients. "While some modest price support could be forthcoming at this level, this appears to be a market setting up for a further price plunge that will require some significant assistance from production curtailments or ramped-up coal-to-gas substitution if a bottom is to be achieved. And with the cash market in a near-free fall at a significant discount to nearby futures, further contango expansion would appear to lie ahead.
"[Monday's] price plunge to 13-year low territory was almost purely a function of weather. Weekend updates to the short-term temperatures views saw a major swing toward the bearish side in reinforcing opinions of an El Nino winter that will be slowing storage withdrawals for a couple more months. This Thursday's release will likely show a draw downsized by some 68% relative to the five-year average decline of about 120 Bcf. We find it difficult to envision a number bullish enough to ignite a meaningful price advance unless a significant shift in the short-term views is forthcoming."
In the day's physical trading eastern prices advanced sharply in concert with higher next-day peak power and also forecasts for higher loads. Intercontinental Exchange reported that on-peak power at the ISO New England's Massachusetts Hub gained $2.53 to $23.29/MWh and on-peak power at the PJM West terminal added $1.65 to $28.22/MWh.
Next-day gas at the Algonquin Citygate jumped 34 cents to $1.69, and deliveries to Iroquois, Waddington added a dime to $1.71. Gas on Tenn Zone 6 200L was seen 26 cents higher at $1.72.
Gas on Texas Eastern M-3, Delivery changed hands 7 cents higher at $1.21, and gas bound for New York City on Transco Zone 6 was quoted 31 cents higher at $1.71.
Power loads were also forecast to rise. ISO New England predicted Tuesday's peak load of 16,810 MW would rise to 17,140 MW Wednesday before easing to 17,060 MW Thursday. The PJM Interconnection reported that Tuesday's peak load of 33,352 MW would climb to 34,295 MW Wednesday and then decline to 34,223 MW Thursday.
Gas at major trading centers was mixed. Deliveries to the Chicago Citygate slipped 8 cents to $1.75, but gas on Kern River rose a stout 14 cents to $2.09. Gas at Transco Zone 4 eased 3 cents to $1.66, but gas at the PG&E Citygate rose by 3 cents to $2.47.
The day's demise of the futures was in place once forecasters studying overnight model runs discovered yet another decrease in heating demand, although not as severe as Monday's. Commodity Weather Group in its Tuesday morning report said, "After yesterday's bigger changes, we still find enough warmer adjustments for another demand loss that is much less than what happened 24 hours ago. We see some minor cooler changes for the Midwest and East for the next few days, and the Midwest is also slightly cooler this weekend, but otherwise, bigger warmer changes are noted in the East for later next week right on into the 11-15 day range.
"The Southwest is also slightly cooler at times. [We] continue to find very good model agreement on the prevailing pattern type. The only conflict we see in the ensemble clusters at the end of the period is that some of them are stronger with additional cold air transport to the West with maybe some bleeding into Texas and the Plains. Otherwise, well below normal demand continues for the Midwest, East, Southeast and also Eastern Canada with the CFS [Climate Forecast System] continuing it well into January, too," said Matt Rogers, president of the firm.