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Natural Gas Futures Slide Further on Production, Cooler Weather

  • August settles at $2.740, down 1.9 cents; September down 2.3 cents to $2.707
  • Production “remains the dominant narrative,” as market seems “more comfortable” entering winter with less in storage, says Bespoke
  • EIA’s latest production forecast likely to aid bears, says EBW’s Weissman
  • Electric transmission issues influencing spot prices in California, Desert Southwest: Genscape

Natural gas futures continued their recent slide Tuesday as strong production and cooler weather trends conspired to help drag down prices. In the spot market, more volatility in Southern California and retreating prices in the Northeast headlined a day of generally small adjustments; the NGI National Spot Gas Average gave back a penny to finish at $2.74/MMBtu.

The August Nymex futures contract settled at $2.740 Tuesday, down 1.9 cents, after marking out a higher high ($2.788) and a lower low ($2.731) versus the previous day’s action. September dropped 2.3 cents to $2.707, while January settled at $2.968, down 2.1 cents on the day.

The latest guidance issued on Tuesday showed slightly above-average cooling load overall the next two weeks but with “decent cooler risks” for the last week of July, and weather patterns appear unlikely to produce the kind of record-level demand that has been needed to drive prices higher this summer, according to Bespoke Weather Services.

Prices initially climbed “on indications that production has declined more than expected from recent highs,” Bespoke said. “However, production still remained high enough that when combined with looser burns the last couple of days and especially significantly cooler medium- and long-range weather trends natural gas prices were forced to reverse, moving steadily lower through much of the morning before finding a low midday.”

Production “remains the dominant narrative, as the market appears more comfortable walking into winter with” even less in storage “at these production levels,” according to the firm.

The Energy Information Administration (EIA) released its latest Drilling Productivity Report (DPR) this week and is forecasting month/month (m/m) production growth from the United States’ seven most prolific onshore oil and gas plays to continue in August.

Total gas production in August for seven key regions -- the Anadarko, Appalachian and Permian basins, and the Bakken, Eagle Ford, Haynesville and Niobrara formations -- is expected to reach 70.53 Bcf/d, compared to 69.47 Bcf/d in July, according to EIA. Total oil production from the same plays is forecast to increase to 7.47 million b/d from 7.33 million b/d in July.

EBW Analytics Group CEO Andy Weissman said the latest DPR data is likely to reinforce the market’s perception that production growth will effectively cancel out the current storage deficit.

“Permian associated gas production is forecast to increase 0.23 Bcf/d m/m, extending the recent output boom,” Weissman told clients Tuesday. “By 4Q2018, however, regional oil and gas takeaway constraints could grind incremental Permian production to a halt, leaving Appalachia as the primary source of new output.

“The natural gas market is in uncharted waters, with exceptional output growth compensating for a low end-of-season storage trajectory,” he said. “The latest DPR is likely to confirm the narrative of burgeoning supplies, potentially giving bears the upper hand.”

Meanwhile, liquefied natural gas (LNG) feed gas demand has been trending upward m/m despite a small drop during the week ending July 12, according to consulting firm Energy Aspects.

“With maintenance on the Creole Trail pipeline’s Gillis compressor station postponed from July 8-10 to an unscheduled later date, Sabine Pass has been running above 90% capacity every day this month,” Energy Aspects said. “LNG feed gas to the facility has averaged 2.8 Bcf/d so far in July, up by 0.3 Bcf/d m/m. Cove Point shipped its third cargo of July” last week, “equaling its total for all of June, even as its gas intake has dipped by 0.1 Bcf/d m/m to 0.5 Bcf/d.”

This comes as total liquefaction capacity is poised to ramp up by next year. Cheniere Energy Inc.’s Train 5 at the Sabine Pass liquefaction facility could see substantial completion as early as October, though the company has stated a June 2019 target date, according to the firm. Cheniere’s Corpus Christi liquefaction facility continues to receive regulatory approvals and is expected to reach substantial completion by 1Q2019.

“However, other projects appear to be increasingly at risk of delay to in-service dates,” Energy Aspects said. Five “mini-trains” that Kinder Morgan Inc. is building at Elba Island in Georgia
have not started the commissioning process, despite the company stating in its 1Q2018 earnings call that the trains would come online every 30-45 days starting 3Q2018.

“...Cameron LNG likewise has not yet begun commissioning on its first train, though it is not scheduled for start-up until 1Q2019.”

Global LNG markets currently should inspire enthusiasm among U.S. exporters, the firm said, pointing to the Japan Korea Marker (JKM) sitting above $10/MMBtu for the remainder of 2018, with January and February of 2019 above $12/MMBtu.

“High prices in Asia continue to be led by strong Chinese demand,” Energy Aspects said. “Our estimates are for China to take an additional 14 million metric tons per year (2.0 Bcf/d) in 2018, up by 35% year/year. China’s response to escalating U.S. tariffs on Chinese imports has yet to include LNG, and gas cargoes could be swapped out if tariffs were imposed. This new demand is not likely to be met by new Australian capacity in 2018. The three under-construction LNG facilities in Australia have yet to ship a cargo despite expectations that each would” during the second quarter, which ended June 30.

In the spot market, day-ahead deliveries to Henry Hub added 4 cents to climb to $2.78 Tuesday, even with analysts expecting a combination of production and softer weather-driven demand to put bearish pressure on prices.

“A weather system with showers and cooling will sweep across the Midwest and east-central U.S. the next few days with highs dropping into the 70s to lower 80s,” NatGasWeather said in its one- to seven-day outlook Tuesday. “Hot high pressure will dominate the rest of the country with highs mainly in the 90s to 110 degrees, hottest from California to Texas for strong demand. Warming will briefly push into the East Friday to Saturday, although with a new system with showers and cooling arriving into the Midwest.”

Radiant Solutions was calling for above-normal temperatures along the Interstate 95 corridor Tuesday to cool to near- or below-normal by Wednesday. The firm forecast highs in Boston Wednesday of 79, down from 85 Tuesday, while temperatures in Washington, DC, were expected to average about 2.5 degrees cooler than normal Wednesday, with a high of 84, down from 89 on Tuesday.

Algonquin Citygate fell 17 cents to $2.77, while Transco Zone 6 New York dropped 7 cents to $2.85.

In the West, SoCal Citygate tumbled 44 cents to average $7.47 Tuesday as the constrained point continued its recent run of elevated pricing, catalyzed by a wave of hotter temperatures in the region.

Radiant Solutions was calling for Burbank, CA, to see highs this week in the upper 80s, with temperatures averaging around 3-4 degrees warmer than normal.

Elsewhere in the region, SoCal Border Average jumped 44 cents to $3.97, while in Arizona/Nevada, El Paso S. Mainline/N. Baja traded 7 cents higher at $4.56.

Genscape senior natural gas analyst Rick Margolin said the strong spot prices in California and the Desert Southwest come “as the location of power generation gets shuffled around to due to transmission line issues.”

The firm’s monitoring of the Western Electricity Coordinating Council region shows “transmission capacity on Path 26 -- a main conduit for power flowing from northern to Southern California -- was cut in half. With heat across the West Coast and Desert Southwest markets keeping loads strong, the restrictions on power imports have forced more generation to occur within” the Southern California Gas Co. (SoCalGas) footprint.

Warmer than normal temperatures in Southern California and Arizona have been supporting demand but not to levels “terribly in excess of month-to-date (MTD) averages,” Margolin said. “Intra-market demand is right in line with the MTD average at 2.38 Bcf/d for SoCalGas, and 3.23 Bcf/d when including El Paso and Kern/Mojave. Arizona demand levels are also holding steady around 2 Bcf/d,” with El Paso posting notice this week of strained operating conditions in the Phoenix area.

The recent heat also coincides with some upstream supply reductions from a combination of lower production and constraints, according to Margolin.

“Permian Basin production is estimated to have dropped below the 10 Bcf/d mark again for the second time this month, while western Rockies production is running about 120 MMcf/d below MTD levels,” he said, adding that El Paso’s notice for the Phoenix area mentioned limited withdrawal capacity for the Washington Ranch storage facility in New Mexico.

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