Natural gas September forward prices rose an average 4.7 cents from Aug. 18 to 24, a gain largely attributed to the current gas storage picture and technical indicators, rather than the monstrosity of Hurricane Harvey brewing in the Gulf of Mexico.
Natural gas markets took their cue from Nymex futures, which started the week with a bang as the September contract jumped around 7 cents on Monday. While rising cash prices were partly behind the surge in futures that day, observed storage data over the Aug. 19-20 weekend that indicated the next two storage reports from the U.S. Energy Information Administration (EIA) may fall beneath the 53 Bcf injection reported for the week ending Aug. 11 also deserve some credit.
Indeed, the EIA on Thursday reported a storage increase of 43 Bcf for the week ended Aug. 18, in line with trader expectations but 10 Bcf below the prior week’s injection. Total working gas now stands at 3,125 Bcf, slightly above the five-year average inventory of 3,080 Bcf but below year-ago stocks of 3,348 Bcf. The year-over-five-year surplus shrank by 10 Bcf during the report week, according to NGI calculations.
“Much attention will certainly be given to weekly inventory changes over the coming weeks, but in all likelihood, the path towards end of October is less relevant than underlying supply and demand conditions re: winter withdrawal season,” analysts with Mobius Risk Group said. “This statement is based on the relatively low probability of either falling meaningfully below 3.8 Tcf, or materially higher than 3.9 Tcf prior to winter.”
Still, the lean build was enough to cause skittish market bears to begin fearing next week’s report, Mobius said. The year-over-year deficit contracted by 21 Bcf this week, but when weather adjusted, the result was 0.6 Bcf/d tight. A comparison to the five-year average is closer to 2 Bcf/d tight, or bullish, the Houston-based company said.
“Looking ahead to next week, there is a strong likelihood of seeing an expansion of the deficit to last year. It has been five weeks since that last occurred, and a resulting impact could be seen late next week,” Mobius said.
All Eyes on Harvey
Still, Thursday’s storage report had little market impact -- the Nymex September futures contract ended the day up just 2.1 cents to $2.949 -- as all eyes were on Hurricane Harvey, which was still a Category One storm at the time of market close on Thursday but had already begun causing supply disruptions along the Texas coast.
And on Friday morning, the market was clearly viewing Harvey, then a Category Two storm that was expected to strengthen to Category Three status by the time it makes landfall across the middle Texas coast late Friday or early Saturday, as more of a demand killer than anything. The Nymex September futures contract opened at $2.947, down two-tenths of a cent from Thursday’s close, but had fallen as low as $2.881 by late morning.
The September contract settled Friday at $2.892, down 5.7 cents on the day.
Aside from Harvey, technical market indicators showed September prices were due for a decline given a host of bearish factors currently circulating in the market, according to NGI’s Director of Strategy and Commodity Research Patrick Rau.
“During the last two weeks, the prompt contract has tried but failed four times to break above the down trendline that has been in place since last Christmas, and heading into today, the contract was trading toward the top of its 20-day Bollinger Band, and stochastics were reaching overbought territory,” Rau said.
All of those resistance levels are also close to the psychological $3 level, and for the market to push futures through that, it must be convinced that the fundamental picture is turning more bullish, Rau said. “As the last two weeks in particular have shown, traders just aren't convinced yet.”
As for Harvey, what is known before landfall is that the storm will cause more demand destruction than loss of supply. Indeed, data and analytics company Genscape Inc. said East Texas weather-driven demand has averaged 2.5 Bcf/d over the past week, but is expected to fall roughly 500 MMcf/d to 1.93 by Sunday.
Louisiana demand as averaged 3.5 Bcf/d this past week and is forecast to dip nearly 300 Mmcf/d to 3.2 Bcf/d over the weekend. After making landfall, Hurricane Harvey is projected to stall just inland of the Texas coast, dumping upwards of 15 inches of rain along a swath stretching from Kingsville, TX, to Lake Charles, LA.
Genscape meteorologists are forecasting that East Texas will see population-weighted cooling degree days (CDDs) average around 14 through the weekend until Tuesday (Aug. 29); the seasonal norm for this time of year for East Texas is 19 CDDs.
In a 4 p.m. CDT update, the National Hurricane Center (NHC) said the eye of Hurricane Harvey, which was upgraded to a Category Three storm Friday afternoon, was located by an Air Force Reserve Hurricane Hunter aircraft and National Oceanic and Atmospheric Administration Doppler radar about 60 miles east-southeast of Corpus Christi. Harvey was moving toward the northwest near 10 mph (17 km/h), but its forward speed was expected to decrease significantly during the next couple of days.
On the forecast track, Harvey will make landfall on the middle Texas coast Friday night or early Saturday. Harvey is then likely to meander near or just inland of the middle Texas coast through the weekend.
Maximum sustained winds are near 125 mph (205 km/h) with higher gusts. Harvey is expected to produce total rain accumulations of 15 to 30 inches and isolated maximum amounts of 40 inches over the middle and upper Texas coast through next Wednesday, the NHC said. During the same time period, Harvey is expected to produce total rain accumulations of 5 to 15 inches in far South Texas and the Texas Hill Country through southwest and central Louisiana.
“Rainfall of this magnitude will cause catastrophic and life-threatening flooding,” the NHC said.
The path Harvey could take after landfall does create some uncertainty that could influence the market after the weekend, Bespoke Weather Services said Friday. While current guidance shows the storm stalling and sitting along the Texas coastline into early next week, it may re-strengthen and slide back toward Louisiana. The result would be more significant wind and rain for western Louisiana by Tuesday or Wednesday.
“A further east track could hit Henry Hub harder. Local supply and demand disruptions could be significant just in time for the September contract expiry Tuesday,” Bespoke’s Chief Weather Analyst Jacob Meisel said, adding that Harvey’s load-killing winds and rain could open up additional downside.
Indeed, the expiration of the Nymex September futures contract and its timing ahead of the Labor Day holiday could lead to some volatility as a good portion of the industry is going to “pack it in” before the long weekend, Rau said.
“I'd expect volumes to be pretty light heading into next Friday (Sept. 1), everything else being equal, unless Harvey provides a long-absent jolt of volatility,” Rau said.
Harvey will be the first hurricane to wash across the Texas coast since 2008’s Hurricane Ike, which slammed into Galveston as a Category Two hurricane with winds that destroyed nearly a dozen offshore production platforms and caused the largest blackout in Texas history, affecting as many as five million people from Texas into Louisiana.
In a Friday report, Genscape said Gulf of Mexico (GOM) production dropped 580 MMcf/d to 2.26 Bcf/d on Aug. 24, from the pre-storm two-week average of 2.84 Bcf/d. The declines are largely due to offshore platform shut-ins causing gathering system receipts at meters on several interstate pipelines to plummet, the company said.
Meanwhile, Tres Palacios stated that they are preparing for the likelihood that their facilities will need to be shut-in. If this occurs, no injections or withdrawals to Tres Palacios storage will be allowed.
Sempra’s Cameron LNG facility was being impacted as the Cameron Parish, LA, Office of Emergency Preparedness on Friday morning issued a mandatory order of evacuation for all areas south of the Intracoastal Waterway. Once Cameron Parish officials determine the threat has passed and roadways are determined passable, the evacuation order will be lifted.
Futures, Forwards Post Gains
Taking a closer look at the futures and forward markets, Nymex futures set the tone for this week, with a bit of choppy trading ahead of Harvey. Overall, the Nymex September contract rose 5.6 cents from Aug. 18 to 24 to reach $2.949; October climbed 5 cents to $2.82; the winter 2017-2018 strip picked up 4 cents to reach $3.21 and the summer 2018 tacked on 3 cents to hit $2.91.
Nationally, forwards prices were up an average 4.7 cents for September, an average 4 cents for October, an average 4 cents for the winter 2017-2018 and an average 3 cents for summer 2018, according to NGI’s Forward Look data.
Most markets were relatively in line with the Nymex futures strip, but some posted more significant gains as pipeline maintenance was expected to restrict flows in some areas. Genscape reported on Thursday that a three-week maintenance on Westcoast will cut southbound flow through Station 4B by over 300 MMcf/d.
The work lifted forward prices at downstream Northwest Pipeline-Sumas, where September forward prices shot up 14 cents from Aug. 18 to 24 to reach $2.558. October was up 12 cents to $2.448, while the winter 2017-2018 and summer 2018 strips each climbed 7 cents to $2.99 and $2.10, respectively, Forward Look data shows.
Northwest Pipeline (NWPL) has accommodated for decreased receipts from Westcoast by withdrawing from storage and increasing receipts from GTN at Stanfield. The planned outage on Westcoast’s 5L2 pipeline that began Aug. 24 will limit operating capacity at Station 4B to 1043 MMcf/d for the rest of August. This location has flowed 1362 MMcf/d on average in the past two weeks, putting 319 MMcf/d at risk, Genscape said.
Although the work is scheduled to continue through Sept. 16, Westcoast has not yet provided information on Station 4B’s operational capacity for the month of September.
Around three-quarters of Westcoast’s southbound flow at Station 4B is delivered to NWPL at Sumas. During a similar maintenance event last year, for example, a drop of 379 MMcf/d at Station 4B led to a 270 MMcf/d drop at Sumas. That event lasted nine days and constrained gas from moving out of northern B.C. on Westcoast, Genscape said.
NWPL was able to make up for the lost gas from Westcoast through a combination of decreased weather-driven demand (~150 MMcf/d), storage withdrawals (increased by ~50 MMcf/d) and increased receipts from GTN at Stanfield (~100 MMcf/d). This upcoming event may not follow the same pattern, however: Genscape meteorologists are forecasting mild to cool weather in the Pacific Northwest at the beginning of this event to be followed by unseasonably warmer temperatures as we move into September.