Natural gas futures rebounded Monday after trading on both sides of even, with the market continuing to weigh production growth against storage deficits as May forecasts hint at cooling demand potential.
In the spot market, points in the Rockies and California posted strong gains amid calls for triple-digit temperatures in parts of the Southwest, while the Northeast bounced back from losses on Friday; the NGI National Spot Gas Average climbed 9 cents to $2.33/MMBtu.
The June contract settled at $2.741 Monday, up 3.0 cents on the day after trading as high as $2.770 and as low as $2.695. July added 2.6 cents to settle at $2.767.
“The market seems to be stable around this pricing area,” INTL FCStone Financial Inc. Senior Vice President Tom Saal told NGI. “We know there’s a lot of gas out there. That’s not disputed. We know we need to put a lot of gas in storage. That’s not disputed.”
As the rate of injections remains an open question moving forward, the larger-than-expected storage build reported last week by the Energy Information Administration “probably took a little bit of the zest away from the bulls, but again, we’ll see what happens next,” Saal said.
NatGasWeather.com said Monday model guidance was advertising a “very comfortable spring pattern for almost all of May apart from weak cool shots across the far northern U.S. and hot conditions over the Southwest into Texas, occasionally into the Southeast.”
Florida and the Southeast should at times see “temperatures reach the lower 90s the next two weeks, although not expected to become sustained until late May,” the firm said. “Once 90s become widespread over the Southeast, we expect it will provide a nice test to see how power burns will compare to last year, which they need to come in stronger to help offset huge increases in production…”
Despite overall natural gas supply coming in nearly 8.0 Bcf/d higher year/year (y/y) during April, the market entered the month of May about 7 Bcf/d tighter, RBN Energy LLC analyst Sheetal Nasta said in a recent note to clients.
“The problem is that the bulk of the incremental demand has been attributable to cold weather, which is a fading prospect at this point,” Nasta said. “...What’s not going to go away, however, is the mountain of gas production that’s been introduced into the market since last year at this time.”
Assuming April 2018 production levels continue through October and imports remain flat y/y, the market would have about 5.9 Bcf/d more supply for the upcoming injection season. On the demand side, assuming flat consumption y/y from the residential/commercial, industrial and power sectors, growth in exports would soak up about 2.0 Bcf/d of the incremental supply growth, according to Nasta.
“That brings us to the final step in the calculation,” Nasta said. “If we take last year’s 8.25 Bcf/d average injection rate for the May-October period and add another 3.9 Bcf/d, that’s an average injection of about 12 Bcf/d.” Estimating 184 days for injections from May through October, “that comes to a total injection of around 2,200 Bcf...add that to the baseline inventory of 1,334 Bcf and you end up with just over 3,500 Bcf in storage by late October/early November” versus inventories well above 3,700 Bcf last year.
“So the bottom line is that, based on the above demand assumptions, current supply levels would be able to wipe out a big chunk of the current storage deficit,” Nasta said. To get back to 3,700 Bcf, “injections would need to be closer to 13 Bcf/d, or nearly 2,400 Bcf total (which would be second only to the 2,590 Bcf that was injected in May-October 2014).”
The scenario isn’t out of the question, Nasta said. RBN estimates suggest injections in May could exceed 400 Bcf versus around 270 Bcf in May 2017.
“Additionally, the Rover Pipeline is expected to ramp up Marcellus/Utica shale takeaway capacity by more than 1.5 Bcf/d in the coming weeks,” she said. “If, on top of that, a mild summer follows, then the market could not only erase the current deficit but also easily end up with a year-on-year surplus in storage by the time November rolls around.”
In the short-term, Genscape Inc. analyst Rick Margolin said the firm expects heating degree days to “roll off the board by Saturday for (what should be) the last time this spring.” Until cooling degree days “kick in, though, Lower 48 weather-driven demand will be in a lull period,” with the firm’s daily supply and demand data showing demand hovering around 57 Bcf/d and not likely to surpass 60 Bcf/d until June.
“That said, from a year-on-year perspective, this May’s weather-normal average is projected to run about 0.7 Bcf/d higher than last May’s actuals on the back of expectations of warmer temperatures (last May was slightly cooler-than-normal) and increased” exports to Mexico and liquefied natural gas sendouts, Margolin said.
As for production, Genscape affiliate’s Spring Rock estimates project Lower 48 dry gas production remaining around 78.5 Bcf/d.
“Production this month-to-date is averaging 78.7 Bcf/d, which is pretty much flat to the April average” as recent declines in the Gulf Coast, Texas and Midcontinent regions, as well as the Rockies, are “outweighing growth out of the Northeast and Permian,” according to Margolin.
“That ought to flip pretty soon here as maintenance wraps up, allowing southern volumes to recover and debottleneck some Permian volumes (although that is not to imply the Permian doesn’t remain constrained; at the moment we show every path out of the basin effectively at capacity or -- in the case of exports to Mexico -- subject to downstream constraints).”
Looking at day-ahead prices, points throughout the Rockies, California and Arizona/Nevada surged by double digits Monday.
“Across the West, scattered showers and a few storms are expected from the Pacific Northwest to the northern Intermountain West/Rockies by Tuesday night and into Wednesday as a cold front moves in from the eastern Pacific,” the National Weather Service said. “...Farther to the south over the Desert Southwest, a heat wave will be in progress underneath upper level ridging, with temperatures near or slightly above 100 degrees for the lower elevations of Arizona, southern Nevada and eastern California.”
Kern River climbed 21 cents to $1.97, while Kern Delivery surged 26 cents to $2.25. SoCal Border Average jumped 27 cents to start the week off averaging $2.19, and the volatile SoCal Citygate added 44 cents to $3.39.
In West Texas, Waha added a penny to $1.83, while El Paso Permian finished even at $1.67.
Planned maintenance this week on the El Paso Natural Gas (EPNG) system could impact more than 300 MMcf/d of Permian volumes, including production, according to Genscape analyst Joe Bernardi.
“The ‘WA2CORN’ point will have its operating capacity reduced to zero for planned pipeline maintenance Tuesday and Wednesday,” Bernardi said. “This meter tracks flows between Gresham and Cornudas and has averaged around 325 MMcf/d since it started reporting on May 1. In EPNG’s segment report, WA2CORN has replaced the ‘WA CORN’ point, which is further upstream, between Waha and Gresham.
“As many as nine points on this line, downstream of the Waha hub but upstream of Gresham, would need to send their molecules back upstream in order to find an alternate route to exit the Permian at Cornudas,” according to Bernardi. “This group of points averaged a net receipt of 312 MMcf/d in April. However, based on recent flow behavior on this part of EPNG’s Permian system, these points may need to send their gas to exit the Permian a different way and/or decrease their receipts, because the nearest westbound meter (L2000) has been flowing essentially at capacity.”
In the Northeast, prices rebounded after points throughout the region posted double-digit losses heading into the weekend.
“After an unsettled weekend across much of the eastern U.S., drier weather is arriving to begin the work week with the frontal zone moving offshore and surface high pressure building into the region,” NWS said. “Temperatures are expected to be near normal through Wednesday before warmer weather arrives by the end of the week.”
Transco Zone 6 New York gained 56 cents to average $2.63 after falling 62 cents on Friday. Further upstream in Appalachia, Tetco M2 30 Receipt added 7 cents to $2.02, while Dominion South slid 3 cents to $1.96.
Texas Eastern Transmission Co. (Tetco) reported unplanned maintenance on its Danville Compressor Station in Kentucky over the weekend, impacting capacity through one of Tetco’s main takeaway outlets, Genscape analyst Josh Garcia said.
“Flows through the 30-inch South line were cut by as much as 323 MMcf/d day/day,” Garcia said. “This is likely to create bearish pressure on M2 prices as one of its two main outlets is constrained. This event is similar to several planned maintenance events that were undertaken in the last month, restricting flows from Berne South to Barton.”
Meanwhile, planned cleaning tool runs Tuesday and Wednesday on Tetco’s 36-inch Lines 1 and 2 from Bedford to Chambersburg weren’t expected to have much impact given moderate downstream demand, according to Garcia.
“Although capacity through the Bedford Compressor Station will be reduced to 2.2 Bcf/d, 231 MMcf/d lower than normal, this event will not be impactful, as downstream Appalachian and Mid-Atlantic demand has been low due to shoulder season weather.”
In Canada, NOVA/AECO C clawed its way back from the negatives Monday, gaining C57 cents on the day to average C56 cents/GJ. AECO averaged an all-time low of minus C1 cent/GJ last Friday. Prices in Western Canada have come under pressure this month with maintenance creating additional bottlenecks for the region’s production, analysts have said.