July natural gas prices were set to open Wednesday about 3 cents higher at $2.931 amid small increases in cooling demand in the near term and sustained strong demand expected to end June and bring in July.
The Nymex prompt month turned firmer in overnight trading as weather outlooks were sizably hotter across the North through much of the long range, according to Bespoke Weather Services. There were not many signs of the pattern breaking down yet, either, though week 3 forecasts trended slightly less hot as the early signs of a transition toward more western ridging for the second week of July emerged that could limit the extent of heat.
“Still, a very strong ridge focused across the Midwest is expected,” Bespoke chief meteorologist Jacob Meisel said. This should “keep the core of heat out of the South and keep record cooling demand from being attained” and “we should still see cooling degree days run consistently far above average.”
The flip hotter in the long term was enough to spur some buying in the market, after Nymex July future suffered two days of steep losses on Monday and Tuesday. The two-day, 12-cent decline in prompt-month values may have been due primarily to the release of the Energy Information Administration’s newest monthly Drilling Productivity Report on Monday afternoon, which predicted that production of natural gas would continue to surge in July, rising by 1.1 Bcf/d, EBW Analytics said.
“This prediction drove down the price of the 2018-2019 winter-month contracts, pulling July-October contracts lower. Balance of 2019 contracts also fell significantly,” EBW said.
In the more immediate term, Genscape Inc. reported that just days after production rebounded to near 79.4 Bcf/d, volumes have sunk again to an estimated 77.65 Bcf/d for Wednesday. On a day/day basis, East production is down nearly 0.47 Bcf/d, and estimated volumes out of Texas are down nearly 0.4 Bcf/d day/day.
On Monday, Northeast production established a new record high of 27.81 Bcf/d. Since then, however, volumes have sunk to 26.96 Bcf/d, led by a 0.34 Bcf/d drop in Northeast Pennsylvania, a 0.29 Bcf/d drop in Ohio and a 0.22 Bcf/d drop in West Virginia.
The West Virginia declines are largely because of Columbia Gas receipts from the MarkWest Sherwood 1 plant dropping nearly 0.35 Bcf/d from Monday. The Northeast Pennsylvania declines were being led by Tennessee Gas Pipeline losing about 0.28 Bcf/d of receipts from the UDP Liberty Dehy in Bradford County, PA, and about 0.15 Bcf/d from the Williams Teel Dehy plant in Susquehanna County, Genscape senior natural gas analyst Rick Margolin said.
In addition to the Northeast and Texas drops, Permian volumes were about 0.5 Bcf/d below Monday, and Rockies volumes were running about 0.2 Bcf/d below Monday.
With July prices rallying early Wednesday, moving off support from $2.87-2.90 to sit up solidly on the day, this continues to be a market where balance and weather are canceling each other out, Bespoke said. Bullish medium- and long-term weather expectations will help support hold, although loose balances should allow $2.97-3.00 resistance to hold as well.
Any production growth could limit additional rallying, and the market needs to see liquefied natural gas (LNG) exports return for prices to really get a bid, “especially with cash prices getting hit hard” on Tuesday. “However, with the current storage deficit and early July heat, we do not yet see risk for prices breaking down as instead another resistance test looks more likely,” Meisel said.
The return of LNG-induced demand may have to wait a bit as Genscape late Monday alerted proprietary clients that its monitors detected signs that Cheniere Energy Inc.’s Sabine Pass Train 1 was shutting down. The alert was issued before nominations data was published and confirmed its observations.
For Wednesday’s gas day, “nominated deliveries to Sabine have dropped to 2.34 Bcf/d, about 0.51 Bcf/d below weekend levels,” Genscape said. Weekend volumes were up at 2.88 Bcf/d, a recovery of about 0.7 Bcf/d from the prior 30 days when volumes were suppressed due to the weeks’ long shutdown of Train 3 Genscape cameras were able to detect the restart of Train 3 well ahead of nominations data as well.
As for Wednesday, the market’s attention is expected to turn to storage inventories. Early estimates have trended in a more bearish direction, with mid to even upper 80s Bcf prints expected, Mobius Risk Group. “These could limit any rally for now.”
The market also should begin to see power burns tighten up a bit given the lower prices, and long-range heat is impressive. Once the heat breaks, however, Bespoke would look for prices to break lower.
Indeed, the market saw a big plunge the last two days, an indication that prices could unravel quickly. While the decline was not a decisive breakdown by any means, it still paints an ominous picture for the July contract, ICAP Technical Analysis’ Brian Larose said.
“At this point, this is the time of year where we look for a retreat into the fall months. Any rally from here would be corrective in nature,” he said. Still, he said work needs to be done to be convinced the market is on the brink of a seasonal retreat.
Crude oil futures were trading 65 cents higher at $65.72, while RBOB Gasoline futures were trading about a half-cent lower at $2.03.