Unrelenting heat that is expected to continue well into September and a bullish storage injection combined to drive up natural gas forwards prices more than 20 cents on average between Aug. 19 and 25, according to NGI’s Forward Look.
With options expiry on Friday and the Nymex September futures contract rolling off the board Monday, some short-covering appeared to be in place as the market responded soundly to forecasts for continued heat.
The Nymex September futures contract jumped 26.2 cents from Aug. 19 to 25, setting the stage for widespread gains across the United States.
“Pullbacks don’t happen as much. It’s all in or all out it seems anymore,” a Northeast trader said, adding that the market added nearly 140,000 contracts in less than two weeks.
Meanwhile, a tropical weather system making its way through the Caribbean and heading toward the Gulf of Mexico also appeared to be giving the market some jitters.
“It looks like the September 2016 Nymex natgas contract was fairly oversold earlier this week, as indicated by the Relative Strength Indicator (RSI),” said NGI’s Patrick Rau, director of strategy and research. “That, and the fact that September goes off the board next Monday, meaning any shorts would have to close their positions anyway, probably caused the market to react to fundamental news such as hurricanes and hotter-than-expected weather all the more.”
While the market normally doesn't see a short squeeze until closer to the actual prompt-month futures expiration, these events combined with an oversold market likely moved any short-covering up by a few days, Rau said.
The futures market looked to be heading for a correction early Friday morning, but prices rebounded and the September contract was up about 5 cents at mid-day.
“I thought the storm premium would come out of the market today, and it started out that way, but in the last hour or so, it walked back up, and I don’t see any change to weather,” the trader said.
The latest 00z weather data confirmed the tropical system currently over the Caribbean tracking toward the Gulf of Mexico, NatGasWeather forecasters said.
The system remains unimpressive and very weak, however, with the upper circulation barely holding together and only scattered thunderstorms evident in satellite imagery. The system is expected to move over very warm sea surface temperatures over the weekend, while upper-level winds should become slightly more favorable, the forecaster said.
“This could lead to the gradual strengthening of the system by early this weekend as it drifts toward the Gulf of Mexico and potentially toward core natural gas infrastructure near and along the Gulf Coast next week,” NatGasWeather said.
Already, parts of Louisiana have seen major flooding this month.
As of Aug. 21, Baton Rouge had seen its August rainfall total reach 26.97 inches, crushing the previous record of 23.73 inches reached in May 1907, according to WeatherUnderground’s Christopher Burt, weather historian.
Since June 1, Baton Rouge has picked up 40.95 inches, more rain in three months than downtown Los Angeles has recorded over the last five years (38.79 inches), according to the Los Angeles Almanac.
The strength of the system currently making its way across the Caribbean suggests gradual intensification into a tropical storm around Saturday evening or Sunday morning, and then potentially a hurricane about five days out, NatGasWeather said.
“It was looking close to dead this morning, but has seen an increase in thunderstorm coverage the past few hours, but is still quite far from tropical storm or hurricane status,” NatGasWeather meteorologist R. Milne said midday Friday.
The Northeast gas trader said prices could see a big jump Sunday night.
But NGI’s Nate Harrison said traders who are pricing in a storm premium due to potential production losses are not considering the whole picture.
“Some who would trade the possibility of storm-induced Gulf production declines may not realize that if the storm hits major population centers, it could actually cause a decline in demand from damages to the grid there,” Harrison said.
Hot weather also is weighing on the market.
Temperatures are now increasing rapidly over the eastern U.S. as high pressure builds in, NatGasWeather said.
“Once high pressure builds into the central, southern, and eastern U.S. this weekend, it will hold ground through the first week of September,” the forecasters said.
Bespoke Weather Services said the latest weather models are becoming increasingly bullish, with above-average temperatures carrying over into the middle of September.
This should allow natural gas storage surpluses to remain in steady decline for many more weeks to come.
The U.S. Energy Information Administration on Thursday reported an 11 Bcf build to storage inventories for the week ending Aug. 19, bullish both to market estimates in the mid-teens Bcf area and to the year-ago injection of 67 Bcf.
“With surpluses now at +355 Bcf versus the five-year average, they should be expected to drop under +300 after the next several builds are accounted for, while also ensuring end-of-season storage will remain under 4.0 Tcf to our view,” NatGasWeather said.
Still, any upside risk for natural gas prices is limited as we get further along into September, with resistance seen at $2.92 and a break above $3 unlikely, Bespoke said.
Looking closer at the natural gas forward curves, the Nymex certainly led the charge as double-digit increases were seen through the balance of the year.
The Nymex October futures contract rose 27 cents from Aug. 19 to 25 to reach $2.885, while the prompt winter jumped 18 cents to $3.23.
Further out the curve, the summer 2017 strip climbed 8 cents during that time to reach $3.01, while winter 2017-2018 edged up just 6 cents to $3.23.
Most other markets followed that general pattern. On a national level, October forward prices averaged 25 cents higher from Aug. 19-25, while the prompt winter rose an average 18 cents, according to Forward Look.
Summer 2017 forward prices were up an average 9 cents, and the winter 2017-2018 package was up an average 6 cents.
At Dominion South, however, price gains were more muted at the front of the forward curve amid some unexpected maintenance on the Tennessee Gas Pipeline.
Tennessee posted notice of the need to implement capacity restrictions on the Broad Run Lateral in West Virginia after line inspections revealed an immediate need for line repairs between Mainline Valves 114-2 and 116-2 near Catlettsburg, WV.
TGP said it expects work to run through Oct. 31.
As such, Dominion September forward prices climbed just 6.6 cents between Aug. 19 and 25 to reach $1.24, while October moved up 15 cents to $1.385.
The rest of the Dominion forward curve essentially mirrored the gains seen in the Nymex and the rest of the country, with the prompt winter tacking on 17 cents to hit $2.07, the summer 2017 strip adding 8 cents to reach $1.85 and the winter 2017-2018 edging up 7 cents to $2.44, Forward Look data shows.
The segment on TGP represents the Broad Run Lateral where Tennessee receives gas from Dominion, TCO, and production from Antero Resources.
TGP flows through Zone 3 pool have averaged 308 MMcf/d in the past thirty days, according to Genscape, a Louisville, KY-based real-time data and intelligence provider for energy and commodity markets.