Natural gas forwards markets slid an average of 6.3 cents at the front of the curve between July 15 and 21, marking the third consecutive week that intense heat, strong power burn and softening production proved no match for swollen storage inventories, according to NGI Forward Look.
The Nymex August contract also was down 6.3 cents during that time to settle at $2.692, but did get some support Thursday when the U.S. Energy Information Administration (EIA) released its weekly storage report.
The EIA reported a 34 Bcf injection into storage for the week ending July 15, which was below estimates in the upper-30 Bcf range.
A lot of up-and-down trading followed the report’s release before prices settled a few cents higher on the day.
The market appeared to be struggling with the fact that while this week’s storage report was indeed bullish compared to both expectations and historical averages, the surplus versus prior seasonal averages expanded for the second week in a row.
“In aggregate, the next four weeks are likely to show further expansion in comparison to prior seasonal highs,” said analysts at Mobius Risk Group.
NGI’s Pat Rau, director of strategy and research, said the market’s apparent confusion also could stem from the fact that there are really two forms of storage: actual gas in storage and gas in the ground that hasn't been produced yet.
“I think the latter is causing lots of confusing and mixed price signals right now, since there is lots of conjecture as to what will happen with production during the second half of 2016," he said.
While there appeared to be uncertainty over which direction prices should go Thursday, the market gave a much clearer signal Friday, when the August contract rose nearly 10 cents in morning trading as scorching temperatures were set to blanket much of the country.
“I'd expect the Henry Hub to be more sensitive to weather over a larger geographical area right now,” said NGI’s Nate Harrison, markets analyst.
“With REX closed up, more of the gas feeding the Midwest has to come up from the Gulf. While that doesn't necessarily push up prices on its own, it should definitely make the balance tighter, all things being equal,” Harrison said.
The Nymex August contract retreated a little from its high by mid-day, trading up about 8 cents on the day.
Friday’s strength comes as weather conditions were set to be some of the hottest in the last five years.
Highs during the last part of July typically range from the middle 80s to near 90 degrees F, according to AccuWeather.
But temperatures on Friday were forecast to average 5-10 degrees above normal across much of the country and will be close to 15 degrees above normal in some locations, the forecaster said.
"With no strong pushes of cool air from Canada on the horizon, people from the mid-Atlantic to the Deep South can expect virtually no relief from the high heat and humidity," according to AccuWeather Meteorologist Kyle Elliott.
High temperatures most days will be in the 90s in New York City; Philadelphia; Washington, DC; Richmond, Virginia; Atlanta and Charlotte, North Carolina, right through the end of July, AccuWeather said.
“It is possible temperatures approach 100 for a day or two from Washington, DC, on south,” the forecaster added.
Futures and cash markets alike were responding to the intense heat Friday morning.
“The prompt August contract is already up a little more than 1%, and further upside to our targets of $2.74 and $2.80 may be possible this morning as prices hunt for the cash response to this heat,” forecasters at Bespoke Weather Services said Friday morning.
The weather agency said, however, that bearish risk on a number of weather models is still prevalent, and for that reason, it is skeptical of any price move above $2.80 in the coming week.
“For now, short-term heat should continue to help the August contract rally further, but a late-day reversal or selling next week remain very real threats,” Bespoke said.
NatGasWeather echoed that sentiment, saying data has been struggling on exactly which regions will see the most extreme heat heading into August, but it does favor modest cooling over some portion of the northern United States.
Regardless, the hot ridge should cover enough of the country to keep natural gas demand stronger than normal, the forecaster said.
“The further east with the core of the most intense heat to start August, the more bullish. The further west, the less bullish,” NatGasWeather said.
Still, the sizzling temperatures the U.S. has seen over the last week has led to impressive power burn, reaching a year-to-date high of more than 38 Bcf/d over the past week, according to several sources.
“Power burn anywhere above the 35 Bcf mark will help to suppress weekly storage injections and, according to current weather forecasts, for the next two weeks, this should be achievable,” Mobius Risk Group said.
But while natural gas markets could continue receiving support on the weather front, production could be a different story.
Dry gas production dipped below 70 Bcf/d during the past week thanks in part to both planned and unplanned outages, helping give prices their boost on Thursday.
As those outages end, however, production is expected to move back above the 70 Bcf/d mark, likely providing some downward pressure to prices.
And questions remain over where production is headed for the remainder of 2016.
If production begins to climb, the market runs the greater risk of being oversupplied heading into November. If not, then the supply/demand picture becomes all the more tight, Rau said.
“Since there is a lot of conjecture about production, I think the market is struggling to put the storage overhang/weekly injections into proper perspective,” Rau said.
“Between 2006-2015, production was in a noticeable and discernible uptrend, so it was easier to put storage overhangs in context. Not really knowing where production is headed now, however, is making that more difficult,” Rau added.
Encana and Southwestern Energy both increased their production guidance for the rest of 2016, and as Rau noted, next week will be "a big week as far as getting more data points. Key reporting North American natural gas producers are Consol Energy, Anadarko Petroleum, Range Resources, EQT Resources, and Cabot Oil & Gas. That's a heavy emphasis on Appalachia production, and considering that is still the incremental growth area for U.S. gas production, those companies should offer some major clues as to what the U.S. production profile could look like for the rest of the year."
But even with an improvement in 2H16 production, year-over-year production comparables will still be difficult, Rau noted. "Point being, my guess is production won't compete with storage for a home nearly as much this winter as it has in the past, so reducing the storage overhang becomes that much more influential, in my view."
Taking a closer look at individual forwards markets, New England once again put up slightly steeper losses across the curve as demand in that region is expected to taper off by the first week of August.
Genscape shows New England demand averaging around 2.21 Bcf/d during the five-day period between July 25-29 but then falling back to an average 2.15 Bcf/d for the period between Aug. 1 and 5.
At New England’s Algonquin Gas Transmission (AGT) citygates, August dropped 14.8 cents between July 15 and 21 to reach $2.73, according toForward Look.
AGT September was down 12 cents during that time to $2.48, while the balance of summer was down 10.7 cents to $2.55.
Nationally, prices for September fell an average 5.5 cents between July 15 and 21, according to Forward Look.
The balance of summer (September-October) was down 6.2 cents during that time, while the prompt winter was down 7 cents.
The Nymex September contract slipped 7 cents from July 15 to 21 to reach $2.659, while the balance of summer slid 7.2 cents to around $2.68. The winter 2016-2017 winter also fell 7 cents to hit $3.16.
As summer draws to a close, prices for the remainder of the year will be heavily influenced by weather and could see some increased volatility if things turn chilly quickly, Mobius said.
“A bullish start to the winter withdrawal season would likely lead to a rapid rise in near term pricing, as drilling activity remains lackluster and corresponding supply response times are lengthened,” the company said.
“Conversely, potentially breaching record inventory levels in a bearish early winter scenario would drive steep discounts in nearby contracts as supply growth would need to be deterred,” Mobius said.