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Market Continues to Fret Over Expected Warmth, Lost Production; August Called Up 6 Cents

August natural gas is set to open 6 cents higher Wednesday morning at $2.95 as overall weather forecasts continue with their outlook for increased warmth and the return of lost Gulf production remains uncertain. Overnight oil markets were mixed.

According to Tim Evans of Citi Futures Perspective, "natural gas extended the rally of the past month [Tuesday] as warmer than normal temperatures continued to provide support. In addition to the temperature forecast, the market may have drawn confidence from expectations for Thursday's DOE storage report, with the early consensus running near 45 Bcf in net injections, a clear step down from both the prior week's 62 Bcf refill and the 78 Bcf five-year average gain for the week ended June 24.

“The downtrend in the year-on-five-year average storage surplus looks a little bit steeper than a day ago, falling from the 678 Bcf mark as of June 17 to a projected 561 Bcf as of July 15. As we've been noting, we certainly can't rule out a continuation of this established trend from beyond that date, although the strength of the trend will remain weather-dependent."

Others see a loss of production from the Enterprise Partners Pascagoula, MS 400 MMcf/d gas processing plant as an important market-driver as well. The plant sits astride the two major pipelines bringing gas from the Gulf of Mexico (see Daily GPI, June 28). "The loss of Destin and Discovery [pipeline] production will combine to leave the grid 0.846 Bcf shorter on the day compared to the 27th and 0.997 Bcf shorter compared to the 26th," said EnergyGPS in a morning note to clients.

"The return date for both pipelines remains unknown. Destin has indicated they will attempt to moved offshore production onto the Viosca Knoll Gathering System as a means of circumventing the Pascagoula processing plant. The magnitude and uncertainty surrounding the decreased Gulf production drove the markets into a frenzy [Tuesday] with the July contract trading up 20 cents before expiration. It is unlikely that we will see much if any downward pressure on the natural gas price until this 1 Bcf of Gulf production returns." 

Weather models overnight gave forecasters a little less confidence, but the ongoing pattern of above-normal temperatures remains intact. "Forecast confidence edges downward slightly [Wednesday] due to a combination of more divergent model guidance and lack of consistency from yesterday," said Commodity Weather Group in its morning report to clients.

"Some bigger cooler changes in the West are noted from the Southwest to the Northwest, while the deep South edges hotter for all periods including another tick hotter for Texas (peaking at 102 F next Tuesday). The models are generally pulling back from stronger heat in the East in the 11-15 day, too, with all three sets of guidance showing near normal on the East Coast, while the Midwest to South ranges from seasonal to hotter than normal.

"In fact, the European ensemble looks different than yesterday, with stronger heat ridging back toward Texas and the South Central U.S. by Day 15 instead of over the Midwest and East," said Matt Rogers, president of the firm.

In overnight Globex trading August crude oil rose 41 cents to $48.26/bbl and August RBOB gasoline fell fractionally to $1.5190/gal.

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