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Natural Gas Forwards Prices Up on Strong Power Burn

October natural gas forward prices climbed as much as 7 cents between Sept. 16 and 22 as continuous power burn growth, strong cash prices and ongoing nuclear outages kept a firm grip on the market, even in the face of a relatively bearish storage report, according to NGI’s Forward Look.

The Nymex futures market set the tone for forwards markets, putting up stout gains early in the week when the prompt month shot up more than 10 cents Tuesday in response to strong cash, which has remained consistently above $3 since then.

Part of the strength in the futures and cash markets is attributed to continuously strong power burn.

September power burn levels are sustaining the summerlong year-over-year growth trend, according to data and analytics company Genscape.

Genscape’s proprietary gas burn model is showing current burn levels close to 32.6 Bcf/d. This brings September’s month-to-date (MTD) average up to just shy of 32.9 Bcf/d, which marks a 0.6 Bcf/d (2%) increase from last September’s MTD average.

The recent strength sustains this summer-to-date’s year-over-year growth by holding the summer-to-date average up at 32.6 Bcf/d, an increase over last summer-to-date of more than 2.9 Bcf/d (10%).

Summer and September burns have been strong due to weather and prices, Louisville, KY-based Genscape said.

“Total power loads have been higher as Lower 48 population-weighted temperatures this summer have averaged 0.3 degrees F warmer than summer 2015 and 0.6 degrees warmer than the prior 10-year average,” Genscape said.

Even in the face of normal to cooler temperatures, gas burn has remained elevated, the company said.

“While this September has been 0.5 degrees F warmer than the 10-year average, so far it is nearly 1.1 degrees cooler than September 2015. Yet burns are greater,” Genscape said.

Gas prices this summer have been sufficiently low enough to price coal out of many independent system operator (ISO) stacks, facilitated by the increased amount of gas-fired generation capacity that has been installed in recent years, (which, in some ISOs, is a product of large tranches of coal retirements), Genscape said.

Overall, the Nymex October futures contract climbed 4.2 cents between Sept. 16 and 22, while November futures rose 4 cents.

Further out the curve, the prompt winter futures strip rose 5 cents during this time, the summer 2017 picked up 1 cent and the winter 2017-2018 edged up 1 cent.

Meanwhile, November forward prices tacked on average 2 cents between Sept. 16 and 22, and the prompt winter forward price climbed an average 5 cents. Both the summer 2017 and winter 2017-2018 forward strips bumped up an average 1 cent, according to Forward Look.

Gains perhaps would have been even more pronounced had it not been for a somewhat bearish storage report.

The U.S. Energy Information Administration (EIA) on Thursday reported a 52 Bcf injection into storage inventories for the week ending Sept. 16.

The reported injection was within expectations, albeit at the high end, but the Nymex pulled back more than five cents that day, surprising many in the market.

"It surprised me because the number was pretty much on target. Not sure why the market took a free fall,” a New York floor trader said (see Daily GPI, Sept. 22)

Even though the injection was once again below prior year levels, it failed to bring stocks below all-time seasonal highs, analysts with Mobius Risk Group said.

“While the result did meaningfully reduce both the year-over-year surplus and the surplus to the five-year average, it failed to bring inventories below all-time seasonal highs. The 3.551 Tcf currently in storage is 32 Bcf more than any prior year at this juncture,” Mobius said.

Next week’s EIA report could demonstrate an inventory gain of more than 60 Bcf, which would be a key bearish threshold if broken, the company said.

In addition to the slightly bearish EIA storage report, the market also received cooler weather forecast updates both overnight and mid-day on Thursday, particularly in the southern U.S.

“If these forecasted temperatures actualize, it would cause late September and early October injections to climb above the 60 Bcf threshold,” Mobius said. “This is important, because any weekly injection climbing above this mark brings the 4 Tcf end of October level back in to consideration.”

Indeed, the southern U.S. is expected to get a brief respite from unrelenting heat that has plagued the region all summer.

A weather system tracking through the western U.S. is expected to spill cooler temperatures southward this weekend and stall until the middle of next week, when it will bring brief cooling across the Midwest, forecasters with NatGasWeather said.

Temperatures in the southern U.S. are expected to then climb yet again, providing for moderate natural gas demand through at least early October. Most other regions of the country are expected to see only modest natural gas demand as temperatures remain comfortable, the weather agency said.

But even with larger storage builds in the weeks ahead due to the more moderate weather, they will continue to remain under five-year averages due to much tighter year-over-year supply/demand balances, NatGasWeather said.

“As long as surpluses remain in steady decline and production fails to rapidly increase, the markets should expect a tighter supply picture as winter arrives compared to last year,” NatGasWeather said.

How prices react from here is tricky, although support around $2.98-3.00 seems like it would be important to hold for the bullish case, the weather group said.

Indeed, the team at Bespoke Weather Services said far more bullish risk was added back into two-week forecasts. That, combined with cash prices holding above $3 and very little loosening in the market at these elevated price levels, makes prices near $3 seem at least a bit more sustainable should the weather begin to cooperate more.

“The result is that natural gas prices were already up about a percent on the day and seem poised to rally back a bit more, as the curve seems quite a bit supportive and weather looks to be far less of a headwind in recent outlooks,” Bespoke said.

Although weather in itself may not yet be a reason to rally, the simple fact that any October heat may be temporarily limited, allowing at least some standard October heating demand to return, could be enough to support prices at these levels. This is especially true as another relatively lean injection into storage is expected to be announced next week, the weather agency said.

“Climate models do show that heat is likely to be the norm across the East through October still, so weather still may work to cap upside moving through the month, but today a move back to $3.05 seems possible with support still $2.92,” Bespoke said.

But as of midday Friday, the Nymex October futures contract had fallen almost 3 cents on the day.

Another curveball could come on the nuclear front.

Arizona Public Service’s 1,249-MW Palo Verde Nuclear Unit 3 went offline unexpectedly Monday but was listed at 12% power Friday morning, according to the U.S. Nuclear Regulatory Commission.

Estimated gas burn replacement is just over 200 MMcf/d, according to Genscape.

Earlier this month, Palo Verde Unit 2 went offline, and Genscape observed an increase in gas deliveries from Transwestern to the Salt River Project, although that does not appear to be the case during this outage.

“Both Transwestern and El Paso posted notices of low linepack in the Phoenix area. However, temperatures in the region are running substantially lower than seasonal norms and are expected to remain low through the weekend, which should reduce pressure on area power loads,” Genscape said.

Diving further into the markets, Northeast points moved against the pack as demand is projected to slide due to moderating temperatures, a slew of maintenance events curtail flows in the region and a backhaul project is expected to go into service a month ahead of schedule.

For example, some of the most pronounced losses occurred at points along the Texas Eastern pipeline.

At Texas Eastern M-2, 30 Receipt, October forward prices tumbled 9.8 cents between Sept. 16 and 22 to reach $1.067, while November prices fell 8 cents to $1.492. The prompt winter, however, was up 2 cents to $2.11, according to Forward Look.

Texas Eastern M-2, 30 Receipt is a new pricing point added to the Forward Look product in August.

At Texas Eastern M-3, October forward prices were down 8.5 cents from Sept. 16 to 22 to reach $1.186, November was down 10 cents to $1.753 and the prompt winter was down 3 cents to $1.98.

The week-over-week declines come as Texas Eastern is expected to begin maintenance Sept. 27 that could cut roughly 195 MMcf/d of southbound flow, according to Genscape.

TETCO will be conducting investigations on its 26-inch Line 3 from Sept. 27 to 29, requiring capacity from Somerset to Summerfield to be reduced to 380 MMcf/d.

Flows during the past 30 days have averaged a very steady 575 MMcf/d, suggesting that the maintenance-induced capacity restriction could back nearly 200 MMcf/d of gas back up north into the M2 and M3 zones, Genscape said.

Also, on Sept. 28 and 29, TETCO will take the Barton compressor station offline for maintenance, reducing southbound capacity through this point to 891 MMcf/d.

Based on the past 30-day flow average, roughly 40 MMcf/d of flows could be cut, Genscape said.

Of more significance, however, is TETCO’s plan to bring its Gulf Markets Expansion Project into service on Oct. 1, a month ahead of the original November in-service date.

The early service start of the project will add 350 MMcf/d of backhaul M2-to-M1 capacity from the Appalachian producing area to Southeast/Gulf area markets.

The capacity is under long-term contract by Northeast producers Range Resources and EQT Energy, as well as CIMA Energy on behalf of parent company Mitsubishi Corp., which holds a roughly 17% stake in the Cameron LNG export project.

The added capacity is expected to support at least 250 MMcf/d of incremental production, with potential for an additional 100 MMcf/d.

Meanwhile, a summerlong maintenance event along New England’s Algonquin Gas Transmission pipeline continues to pressure the front of the Algonquin forward curve.

Currently, maintenance has reduced capacity through the Stony Point compressor station to 709 MMcf/d, the lowest throughput this summer. Beginning Sept. 25, some capacity will return, increasing to 912 MMcf/d, where it will largely remain until Oct. 31.

AGT October forward prices plunged 14.6 cents between Sept. 16 and 22 to reach $2.392, but November forward prices jumped 13 cents during that time to hit $3.405. The prompt winter was up 11 cents to $6.02, while the rest of the curve shifted only a penny or so, Forward Look data shows.

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