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Production Overwhelms as Natural Gas Bears Gain Upper Hand; East Coast Spot Higher on Heat

Surging natural gas supply continues to act as a yoke on futures prices; data showing record-level production, combined with expectations for more seasonal weather later in the month, helped send futures lower Monday despite large storage deficits and bullish near-term forecasts.

In the spot market, hot temperatures along the Interstate 95 (I-95) corridor lifted Northeast and Mid-Atlantic points as restored pipeline capacity out of the Permian Basin helped boost prices in West Texas; the NGI National Spot Gas Average finished 7 cents higher at $2.76/MMBtu.

The August futures contract settled 6.2 cents lower Monday at $2.862, not far off the $2.852 intraday low after trading as high as $2.927. September settled at $2.844, down 5.7 cents.

The drop to start the week suggests “production is just too strong for the markets to ignore, aided by reports of weekend production at or exceeding all-time highs, thereby weighing more heavily on prices than hefty deficits and hotter than normal temperatures,” NatGasWeather said.

Prices now are down 15 cents since last Thursday when the Energy Information Administration issued “a bearish revision” to the prior week’s storage data, while “the markets appear to be stating record production is back in the driver’s seat and hotter trends might be needed for bulls to regain momentum.”

Lower 48 production appears to have cracked the 80 Bcf/d mark, according to recent data from Genscape Inc. Following pipeline reported revisions to nominations data, its production team showed volumes hit around 80.05 Bcf/d on June 28 and 29.

Bespoke Weather Services attributed Monday’s sell-off to production reaching “record levels” over the weekend and to a slight cooling in medium-term forecasts.

“Risk remains to the downside moving through the week as well, as though short-term forecasts have very significant heat and power burns remain quite tight we see production as easily canceling those factors out,” the firm said. “Longer-term we would expect forecasts to gradually cool through the second half of July, further exacerbating downside in a natural gas market that needs record heat to be sustained to cancel out supply growth.”

Bespoke said potential demand destruction from the Fourth of July holiday could further pressure prices and put $2.82 or even $2.75 in play.

While futures slid Monday as record-level supply continues to weigh in favor of the bears, near-term cooling demand helped drive premiums for spot prices in the Northeast and Mid-Atlantic.

“There's still impressive heat to play out this week over large stretches of the country, where cooling degree days (CDD) “will be much greater than normal and demand stronger than normal,” NatGasWeather said. The forecaster called it “a solidly bullish pattern this week as hot high pressure dominates most of the country with highs of upper 80s to 100s.

“There is a weak front draped across the far northern U.S. providing brief cooling to Chicago” on Monday “with highs back into the 80s, but will quickly rebound into the 90s Tuesday through Thursday,” the firm said. “The East Coast will remain hot through Thursday with temperatures well into the 90s, including major Northeast cities due to strong high pressure overhead.”

Looking further out, “the core of the hot ridge is expected to shift over the western and central U.S. as the week progresses,” allowing a system with cooler air to reach the East by the weekend with temperatures in the 70s and 80s.

Radiant Solutions was calling for temperatures to remain well above normal along the I-95 corridor Tuesday, with highs in the low to mid 90s in population centers including Boston, New York, Philadelphia and Washington, DC. The forecaster was calling for highs in those cities to ease off by a few degrees through the end of the week, with average temperatures still remaining hotter than normal.

Algonquin Citygate picked up 17 cents to average $3.54 Monday, while Transco Zone 6 New York averaged $3.48, up a dime on the day. Transco Zone 5 surged 24 cents to $3.50.

The Fourth of July holiday will likely take out a sizeable chunk of demand from an otherwise strong week for cooling load, according to Genscape Inc.

“Lower 48 power burns for this week are expected to average near 35.1 Bcf/d; this is 3.6 Bcf/d higher than last week’s average burns,” Genscape Senior Natural Gas Analyst Rick Margolin told clients Monday. “Temps are expected to increase through the work week, and by Friday Genscape meteorologists are projecting CDDs to come in at about 32% above normal (160 CDDs compared to 122 CDDs) for this time of year.”

However, Genscape’s natural gas daily supply and demand analysts “are expecting the Independence Day holiday on Wednesday to have an average impact of roughly 16 Bcf less total demand for the week,” which includes the holiday.

West Texas spot prices saw a bump Monday as producers benefited from the lifting of a force majeure that had been restricting flows out of the Permian Basin on El Paso Natural Gas (EPNG). The force majeure affected flows between EPNG’s Guadalupe and Cornudas compressors but was lifted as of the Intraday 3 cycle on Sunday, according to Margolin.

“The operational capacity at the ‘GUADLUP’ constraint point has consequently been increased to 1,154,000 Dth/d (roughly 1,126 MMcf/d),” Margolin said.

As of the evening cycle for Monday’s gas day, scheduled capacity through the constraint point was around 952 MMcf/d, he said.

“This rebound in scheduled flows is right in line with scheduled capacities seen prior to the force majeure declaration; only 11 MMcf/d lower than the seven day average leading up to the restriction,” Margolin said. “The force majeure was originally declared on June 18 due to pipeline anomalies.”

El Paso Permian shot up 25 cents to $2.04, while Waha surged 35 cents to $2.19.

In the Midwest, prices were mixed. Radiant Solutions was forecasting highs in Chicago this week in the upper 80s to low 90s, with average temperatures climbing later in the week to around 9 degrees hotter than normal.

Chicago Citygate notched 4 cents to $2.83, while REX into NGPL-Moultrie shed 2 cents to $2.73.

Further upstream in Appalachia, day-ahead prices retreated Monday. Dominion South fell 12 cents to $2.40.

Dominion Energy Transmission Inc. was scheduled to begin work on upgrades Monday at its Mockingbird Station in West Virginia related to the Supply Header Project, though impact to flows was expected to be minimal, according to Genscape analyst Allison Hurley.

“The station upgrade maintenance is expected to take roughly two months; Dominion lists the ending date for the work as Aug. 31, but they have been known to regularly revise their planned outages calendar,” Hurley said.

Meanwhile, Rover Pipeline LLC is once again in regulators’ crosshairs as FERC staff last week said the company was unlikely to meet the restoration deadlines set out in a May 1 order approving service on the Vector Delivery Meter Station, Defiance Compressor Station and the Market Segment.

According to a letter to the pipeline signed by the Federal Energy Regulatory Commission’s John Wood, deputy director of the Office of Energy Projects, Rover was expected to miss the June 30 (Saturday) deadline for completing restoration work on those facilities, in violation of the terms of the May order.

Most of the remaining portions of Rover’s final phase of construction entered service at the start of June, upping flows on the pipeline from around 1.6 Bcf/d to roughly 2.2 Bcf/d, according to NGI’s daily Rover Tracker. But FERC has yet to authorize service on four supply laterals, including the completed Burgettstown and Majorsville lines, potentially limiting supply into Rover, which is designed to flow 3.25 Bcf/d out of the Appalachian Basin into Midwest, Gulf Coast and Canada.

Wood suggested last week that progress on restoration work could influence FERC’s future decisions on the project’s remaining in-service requests.

For its part, Rover fired back at FERC in a letter Monday, attributing the delays to weather conditions beyond its control and said it has “acted in good faith” throughout the process to inform the Commission and landowners of the issues it’s encountered and to address them.

“Rover kept FERC informed of the progress of the restoration efforts on the Market Segment, and had informed FERC that it was preparing a letter for the docket to explain the brief, weather-driven delay in the completion schedule,” Rover Senior Vice President Chris Sonneborn, head of engineering, wrote to FERC Monday.

“Although Rover was attempting to engage FERC staff in a discussion regarding the anticipated date of completion of restoration activities on the Market Segment, FERC staff, rather than relaying specific concerns, as a first step, chose instead to send a public letter implying otherwise. In fact, Rover has been communicating this information to FERC and landowners throughout the process, and staff knows that to be the case.”

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