Physical natural gas for next-day delivery ground higher Tuesday, with nearly all points adding a nickel or more and Henry Hub trading over $3 for the first time in more than a year.
Gains were widespread, and the NGI National Spot Gas Average rose 3 cents to $2.70. Robust near-term temperature forecasts and strong gains in next-day power helped elevate Mid-Atlantic quotes, but New England points took double-digit drubbings.
Futures trading was uninspired after Monday's 12-cent surge. At the close, October was six-tenths of a cent lower at $2.909 and November had risen all of three-tenths of a cent to $2.989. October crude oil turned tail and plunged $1.39 to $44.90/bbl.
Producers are often quick to lay rigs down and slow activity when prices fall, but it can be strategically useful to keep an equally sharp eye out for when market conditions improve and production requirements require additional drilling.
Analysts at BTU Analytics point out that the inventory of drilled but uncompleted wells (DUC) "is winding down, with only enough inventory left to hold production flat into early next year at current activity levels. Production in the Northeast has been able to continue to grow despite the downturn in Marcellus drilling activity. Growth continued, in part due to a large excess backlog of drilled, uncompleted wells and completed wells on backlog (COB). When and how much will producers need to ramp up activity in the region to meet new pipeline commitments?"
Tuesday futures waffled to a mixed close, but Monday's 12-cent gain caught a few traders by surprise as fundamentals at first glance don't appear to support that much, if any, shoulder season price advance. Weather forecasts are moderate and storage is ample, if not burdensome.
Digging a little deeper, it appears that increased power burn, even in the face of falling loads, is the culprit. "Most of the market was surprised to see the front Nymex natural gas contract up 10 cents as they walked in the door [Monday] morning," said analysts at EnergyGPS, a Portland, OR-based power and risk management firm, in a Tuesday morning report. "After all, North American load had dropped to fall-like levels after a very hot summer, and there was no heat in the forecast. Saturdays load was expected to be right at the same levels witnessed over the Labor Day weekend. If that materialized, then we could expect natural gas power burns to drop down to 30 Bcf or lower for Saturday and Sunday. That did not happen. Most market participants were surprised to see that the power burns, the major component of summer demand, had only fallen down to 32 Bcf despite a material drop in load.
"Breaking down the power burns by region, we noticed that the East, Midwest and South Central regions had not fallen by the amounts that were anticipated before the weekend started. This indicated to us that there was a material change in the generation supply stack for those regions in order for them to justify the higher power burns.
"We started to check the coal generation monitors only to discover that output had fallen off in many areas to levels not seen since May. MISO led the drop with more than 15 GWs of coal generation reductions. MISO was not alone. PJM also joined the party, taking off more than 12 GWs of coal fired generation. Other areas of the country also took coal plants offline. Combined with several other factors, the power burns for this past weekend were 2.5+ Bcf higher than anticipated.
"With this coal generation coming offline, it creates a higher baseline burn rate for natural gas-fired generation this fall and heading into winter. This increase in gas demand directly affects the daily storage injections for the rest of the summer, thereby lowering our end-of-season totals."
Could this be a game-changer going into the winter heating season? EnergyGPS said this "is just the tip of the iceberg" as far as a changing natural gas supply-demand matrix is concerned.
In physical market trading, next-day warmth at eastern points helped boost quotes. Forecaster Wunderground.com reported that Boston's Tuesday high of 82 degrees would reach 87 Wednesday before dropping to 67 Thursday, 7 degrees below normal. New York City's Tuesday max of 84 was seen climbing to 88 Wednesday before falling to 75 Thursday, 1 degree below normal.
Gas bound for New York City on Transco Zone 6 jumped 25 cents to $1.63, and farther south, gas destined for southeasternmost Pennsylvania, Trenton and southern New Jersey on Transco non-New York North added 26 cents to $1.63.
Next-day power was also firm. Intercontinental Exchange reported on-peak power at the PJM West terminal rose a stout $10.86 to $46.38/MWh and peak Wednesday power at the Indiana Hub rose $2.40 to $38.90/MWh.
Major market hubs for the most part rose. Gas at the Chicago Citygate was unchanged at $2.92, and deliveries to Henry Hub were quoted at $3.06, the first time over $3 in more than a year. Gas on El Paso Permian was quoted 7 cents higher at $2.79, and deliveries to the PG&E Citygate came in 9 cents higher at $3.42.