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Near-Record Production Pressuring January NatGas -- Despite Frigid Temps; AECO Gains On Oilsands Growth

It was another week in the red for natural gas forward markets as January prices shed an average 15 cents from Dec. 8-14 as significantly colder weather forecast for the remainder of the year was not enough to take down near-record production in the Lower 48, according to NGI’s Forward Look.

Most of the week’s decline could be attributed to last Tuesday’s bloodshed, in which the Nymex January futures contract plunged 15 cents to $2.678, after the Energy Information Administration (EIA) in its Short-Term Energy Outlook called for a more than 6 Bcf growth rate for U.S. dry gas production in 2018.

Lower 48 production has been trending at near-record levels for December at around 76 Bcf/d, and the EIA said 2017 annual production is expected to average 73.5 Bcf/d, a 0.7 Bcf/d increase over 2016.

Mobius Risk Group analyst Zane Curry said the significant production increase that is estimated for 2018, which the EIA expects largely will come from growth in the Marcellus and Utica shales, is tough to grasp given the natural gas market’s low price environment.

Indeed, a look at the Nymex futures curve shows prices averaging just $2.79 for calendar year 2018, $2.79 for 2019 and $2.80 for 2020.

“That growth rate is really difficult to fathom when you take the EIA’s own data and look back historically over the shale era, where only two times has there been that much year-over-year growth,” Curry said.

A look at historical EIA data shows U.S. natural gas marketed production was at 22.3 Tcf in 2010, 24 Tcf in 2011 and 25.3 Tcf in 2012. From 2014-2015, production jumped to 28.8 Tcf from 27.5 Tcf.

Over the same time span, natural gas prices fluctuated widely, beginning 2010 in the $6.00/Mcf range but falling as low as $1.65 by December 2015. For the entire period, prices averaged $3.63.

In addition to the sharp production growth expected in 2018, Curry said the gas market’s current behavior is also “perplexing.” Overnight Thursday, the Nymex January futures contract rose nearly 5 cents as weather forecasts called for colder weather in the long range. But by midday Friday, the prompt-month contract was back in the red. The Nymex January contract eventually settled Friday at $2.612, down 7.2 cents on the day.

The latest weather outlooks showed the European weather model trending notably colder Dec. 24-28, as it had been the warmest of the weather models in recent days, according to NatGasWeather.

“Clearly this was not enough as other factors appeared to weigh more heavily on prices this morning other than weather patterns. Prices sold off a few additional cents as milder trends were revealed in the mid-day data,” NatGasWeather said.

For the week, it appears that while cold weather is on tap, each blast may be followed up by a mild break, therefore capping any upside to demand. What remains most important is just how strong a ridge over the eastern United States will be Dec. 23-27 and whether it will give up ground to frigid air trying to advance out of the western and central part of the country.

The weather data has been flip-flopping between colder and warmer trends with the ridge but it was notably colder Thursday night, especially the European model, said NatGasWeather. It failed to stick, however, as the latest global model is back to being a bit warmer, “which is par for the course...as the data has been frustratingly inconsistent. The data is still quite cold Dec. 23-28, just not as impressively so.”

The inconsistency in weather outlooks is one reason the market is not inclined to drive up prices. “Year-over-year (y/y) comparisons are a powerful force in the market. Pricing dynamics that occurred in 2016 are coloring people’s view of how to treat the market,” Curry said.

It was around the same time last year when “weather outlooks started trending colder and calendar 2017 prices went crazy.” Then, the remainder of winter played out exceptionally mild. “The market is trying so hard not to make the same mistake twice that it could be making the same sort of mistake, just in the opposite direction,” he said.

NGI’s Patrick Rau, director of strategy and research, said traders for now are far more certain that natural gas production will continue to grow -- especially in the face of higher oil prices and all the hedges producers have done since oil rose above $50/bbl  -- than they are about cold weather.

“You don't have to show them more production, but you do need to show them colder weather,” Rau said.

While that probably wouldn’t have been the case following the polar vortex of 2013-2014, “with two warm winters in a row, it's more of a ‘show me sustained cold weather first, and then I'll believe it’ mentality,” he said.

From a technical standpoint, January has been gripped by the downward sloping channel that formed right after January became the prompt-month contract. “Given all the cold weather, if January can break above and settle above $2.70, there could be some strong buying action,” Rau said.

The coming week is considered vitally important, not only because January expires soon, but also because it’s just ahead of the Christmas holidays. “I wouldn't expect nearly as many folks to be active after Friday,” he said.

No Weather Hype?

Taking a deeper dive into the markets, most markets followed the Nymex lead. The Nymex January futures contract lost 9 cents from Dec. 8-14 to reach $2.684, as did February and the balance of winter (February-March), which fell to $2.704 and $2.69, respectively. Calendar 2018 prices were off 8 cents to $2.72, while calendar years 2019 and 2020 remained relatively well supported at $2.79 and $2.80, respectively.

Like last week, Northeast markets suffered a far greater blow despite demand in parts of the region reaching their highest levels of the winter so far. In New England, demand surpassed 4 Bcf/d on Thursday; it had been averaging closer to 3 Bcf/d. Data and analytics company Genscape Inc. said it was around this same time last year when demand rose above 4 Bcf/d.

Spot prices at Algonquin Gas Transmission City-gate responded accordingly, jumping into the $9 range for gas days Wednesday and Thursday before retreating back to around $7 for Friday’s gas day.

Despite the cold forecast for the remainder of the year, Genscape showed demand tapering off closer to month-to-date levels, averaging 3.10 Bcf/d for Dec. 18-22 and 3.27 Bcf/d for Christmas week.

The return to more normal levels of demand sent forward prices at AGT CG tumbling. January forward prices dropped 96 cents from Dec. 8-14 to reach $7.757, February plunged 90 cents to $7.84 and the balance of winter (February-March) fell 62 cents to $6.34, according to Forward Look.

It was a similar story across the U.S. Northeast, where January forward prices lost anywhere from 75 cents to around $1 during that time frame.

AECO In Black On Oilsands Demand

If there was a shining star in the gas markets, it was in Western Canada, where AECO was the lone market to end the Dec. 8-14 period in the black.

Oilsands production has significantly boosted gas demand in Alberta and now accounts for 50% of total demand in the province, according to Genscape. Year-to-date, oilsands production has consumed about 2.4 Bcf/d. In 2013, oilsands consumed an estimated 1.6 Bcf/d, which amounted to roughly 40% of then-total Alberta gas demand.

Genscape expects the growth in absolute gas demand and its portion of total Alberta demand to continue as oilsands production grows through 2020. In the process, the change between Alberta’s winter demand peak and summer trough should tighten because of the general lack of seasonality in oilsands production and demand for gas.

Interestingly, a look at the AECO forward curve shows prices for the balance of winter (February-March) averaging $1.30 and the summer 2018 averaging $1.14. That spread actually expands between the next winter and following summer, however. The winter 2018-2019 averaged $1.54 as of Dec. 14, while the summer 2019 averaged $1.26, Forward Look shows.

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