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NatGas Market Skittish Over Warm Shift in Next Week’s Cold Pattern; Bearish Storage No Help

For natural gas markets, sometimes the weather forecast giveth, and sometimes it taketh away.

After gaining for three straight trading days on calls for a cold weather pattern to develop next week, some overnight model runs that suggested that same cold pattern might not be as strong as previously thought prompted a 15.4 cent sell-off in the January contract Thursday. Meanwhile, warm temperatures leading up to next week's cold had the spot market reeling, and the NGI National Spot Gas Average tumbled 18 cents to $2.78/MMBtu.

After venturing above $3.210 a day earlier, January natural gas settled at $3.025 Thursday, with a good chunk of the decline occurring in the overnight hours. February settled 14.7 cents lower at $3.032.

The cold pattern that had excited the bulls earlier in the week didn't disappear, but it trended a little warmer, Commodity Weather Group President Matt Rogers told NGI Thursday.

"Every model came in warmer overnight,” Rogers said. “Basically, they didn't get rid of the cold pattern, they just weakened it. But I'll tell you, this market is so skittish because of how warm it's been the past two winters that any sign of warming is an exit risk.”

With the colder temperatures sitting further off in the forecast for now, the outlook could change “once we start getting some cold in the near-term and you start getting some pressure on cash," he said.

Thursday's storage inventory report from the Energy Information Administration (EIA) didn't help to stop the bleeding, with the final number coming in slightly bearish versus market expectations.

For the week ended Nov. 24, EIA reported a net 33 Bcf withdrawal from U.S. gas stocks. Last year 43 Bcf was withdrawn, and the five-year average for the period is a withdrawal of 47 Bcf.

In the minutes following EIA's 10:30 a.m. EDT release, the January contract briefly dipped as low as $3.051 before settling back into a choppy pattern in the $3.065-3.080 area that had preceded the report. By 11 a.m. EDT, January was trading around $3.073. Another move lower followed after noon EDT.

The market had been anticipating a slightly larger withdrawal than the final number. A Reuters survey of traders and analysts had predicted on average a 37 Bcf withdrawal for the week, with responses ranging from -28 Bcf to -54 Bcf. Kyle Cooper of ION Energy expected a 33 Bcf withdrawal, while Stephen Smith Energy Associates was calling for a withdrawal of 41 Bcf, lower than an original estimate for a 45 Bcf withdrawal. PointLogic Energy models were predicting a 35 Bcf withdrawal.

Total working gas in storage now stands at 3,693 Bcf, versus year-ago stocks of 4,002 Bcf and a five-year average of 3,800 Bcf. The year-on-five-year deficit shrank week/week by 14 Bcf to -107 Bcf, the EIA data show.

By region, the Midwest saw a 22 Bcf withdrawal for the week, while 15 Bcf was withdrawn in the East. The Mountain region saw 1 Bcf injected for the period, and 3 Bcf was injected in the South Central region, including 8 Bcf injected into salt storage and 5 Bcf withdrawn from nonsalt.

Bespoke Weather Services judged the -33 Bcf figure as "slightly bearish," coming in "a bit looser than last week's print but on a 10-week basis is about flat.

"The market appears unimpressed, barely moving off the print as focus is instead on forward weather expectations and increasing production levels," Bespoke said. "We see this number as confirming our concerns about elevated production being able to absorb additional demand as we move through the winter, and see current market balance as one key reason we have pulled back so significantly from highs despite only limited gas-weighted degree day losses."

Despite more dramatic ups and downs recently, gas remains range-bound, according to Powerhouse's Elaine Levin, president of the Washington, DC-based risk management firm. The difference is looming weather has "accelerated the time it's taken to move within that range."

Even after a steep 15-cent drop, "where did we end up? Back at $3," she told NGI. "...If you look at storage coming into the winter, production and everything else, it seems to me the market's feeling that we're closer to an equilibrium than not...until something tilts -- and either that tilt will be colder-than-normal or warmer-than-normal, we'll have to see -- it doesn't seem like the market really wants to go too far from $3 either way."

Production has pushed above 76 Bcf/d as the market waits for colder weather to lift demand, according to PointLogic's Jack Weixel, vice president of the analytics firm.

With nationwide temperatures expected to fall from Dec. 6-Dec. 12, "the first two weeks of December could show significantly higher storage withdrawals than currently modeled, should the referenced cold troughs hold over the Midwest and Eastern regions longer than predicted," Weixel said in a note to clients Thursday.

"As of Thursday, total demand will average 72.6 Bcf/d for the week ending Dec. 7, with demand peaking on Dec. 7 at 81.2 Bcf/d, or over 11.6 Bcf/d higher than Thursday's estimated demand of 69.6 Bcf/d," he said. "The week ending Dec. 14 will likely come in even higher at an average near 83.4 Bcf/d. For reference, winter 2016/2017 saw only six weeks when domestic demand averaged over 82 Bcf/d and only one of those weeks was in December."

As for production, Thursday's "evening cycle nominations mark the ninth straight day that Lower 48 dry gas production has exceed the 76 Bcf/d mark,” he said.

Genscape Inc. has also recorded estimated production levels exceeding 76 Bcf/d. Genscape’s estimates from Tuesday and Wednesday came in "more than 2.1 Bcf/d higher than the start of the month," it said in a note to clients Thursday. "In that span, Northeast production is close to 1.3 Bcf/d higher, led primarily by Northeast Pennsylvania gains in excess of 0.65 Bcf/d. Within the Northeast, pipe samples show the systems with the largest gains include" Tennessee Gas Pipeline, Dominion, Stagecoach and Transco.

"Southwest Pennsylvania is showing more than 0.35 Bcf/d of growth along with about 0.15 Bcf/d of growth in Ohio and West Virginia,” Genscape said.

The less-than-impressive near-term demand had the cash market awash in red ink Thursday. Henry Hub established a baseline for the day's broad-based declines, giving up 12 cents to $2.94.

Outside of California, where supply constraints had SoCal Citygate approaching $6/MMBtu, most regional averages fell by double digits.

In the Northeast, Algonquin Citygate fell 13 cents to $2.94, about half its December bidweek average of $5.80, according to NGI's Bidweek Alert. Transco Zone 6 New York dropped 11 cents to $2.93.

Losses were heavy in the Midwest, with MDA Weather Services forecasting well-above-normal temperatures in cities like Chicago through the weekend and into early next week. Chicago Citygate tumbled 21 cents to $2.78, while Joliet fell 21 cents to $2.80. Northern Natural Demarcation dropped 27 cents to $2.64.

In Appalachia, Dominion South fell 19 cents to $2.37, and Columbia Gas gave up 12 cents to $2.79. Tetco M2 30 Receipt dropped 23 cents to $2.30.

Further west, the Cheyenne Hub fell 25 cents to $2.44, while Kern River dropped 8 cents to $2.65. Kern Delivery traded even at $2.86.

In California, the volatile SoCal Citygate continued to push higher even as Southern California Gas was forecasting moderately lower demand on its system the next two days. Day-ahead prices at SoCal Citygate averaged $5.92 Thursday, up 66 cents. December bidweek prices at SoCal Citygate have traded as high as $7.55 and have averaged $6.31, according to Thursday's Bidweek Alert.

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