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Natural Gas Forward Curves Catapult Higher as Storage Concerns Grow

September natural gas prices jumped an average 13 cents from Aug. 2-9, fueled by growing concerns about persistently low storage inventories that led to a six-day rally in Nymex futures, according to NGI’s Forward Look.

The Nymex September gas futures contract rose 14 cents over the period to settle Thursday (Aug. 9) at $2.955, while October rose similarly to $2.959 and the winter 2018-2019 strip jumped 20 cents to $2.96.

Concerns over the low storage stocks began emerging earlier this month, when the Energy Information Administration (EIA) on Aug. 2 shocked the market with a well below-consensus 35 Bcf injection, the third bullish miss in a row. This week’s storage report was more on target as the EIA reported a 46 Bcf injection, but the print still indicated a tight market and did little to chop away at the persistent deficit. In fact, the deficit to year-ago levels shrank by just 17 Bcf, while the deficit to the five-year average grew by 7 Bcf. At 2,354 Bcf, stocks are 671 Bcf below last year and 572 Bcf below the five-year average, according to EIA.

“We are over halfway through the summer injection season, and total inventories are on pace to enter winter below 2014 levels,” analysts with BofA Merrill Lynch Global Research said. The underwhelming injection pace has occurred despite production growth averaging about 7.4 Bcf/d higher year/year thus far this summer. “We expect production to continue growing for the balance of summer, but time is quickly running out to inject gas,” commodity strategist Clifton White said.

Indeed, it appears that even with growing production, supply/demand balances remain tight, suggesting the next storage report could come in lighter than the five-year average by more than 20 Bcf due to widespread heat over the West, South and East, thereby increasing deficits even further, NatGasWeather said.

Genscape Inc. said compared to degree days and normal seasonality, the 46 Bcf injection is about 1.0 Bcf/d tight versus the five-year average. And while the latest EIA report helped to slightly close the year/year deficit, the deficit to the five-year average actually widened once again, and inventories are the lowest they have been at this time in the last five years.

The data and analytics firm agreed that the situation shows no signs of correcting in the EIA’s Aug. 16 report: its supply/demand model’s preliminary estimate for the week ending Aug. 10 is showing an injection of only 39 Bcf.

“While we do show production holding above the 80 Bcf mark, power burns this week have been strong, having topped the 40 Bcf/d level on a couple of days, sustaining what has come to be the strongest summer-to-date for burns in the past five years,” Genscape senior natural gas analyst Rick Margolin said.

He noted, however, that Genscape’s storage estimate is early and not its composite estimate, which includes its storage sample. “But at the moment, if realized, we would be looking at an injection about 40% smaller than last year and the five-year average for that week,” Margolin said.

Broken down by region, inventories as of Aug. 3 stood at 575 Bcf in the East, 579 Bcf in the West, 148 Bcf in the Mountain, 245 Bcf in the Pacific and 807 Bcf in the South Central.

BofA Merrill Lynch Global Research analysts assume the East, Midwest, Mountain and Pacific regions will attempt to get gas stocks as full as possible heading into the winter, as this is their best insurance policy to avoid running out of gas during the winter. “Given the overall low inventory environment, we believe each non-South Central region will strive to enter this winter with inventories above their five-year minimum levels and will call on the South Central to balance,” commodity and derivatives strategist Francisco Blanch said.

He cautioned, however, that unless total inventories end significantly above their current forecast levels, higher prices are needed to ration the limited inventories. In order for the non-South Central regions to achieve the meager five-year minimum benchmark, these regions would have to inject record weekly volumes during the fall.

The last time these regions had such low inventories heading into the winter was 2014 during the recovery from the Polar Vortex winter of 2013-2014, according to BofA Merrill Lynch Global Research. A cold November 2014 led to strong cash prices across the country, but a mild December 2014 and loose balances quickly reversed the rally.

“We expect loose balances to overwhelm the market once this winter is over, but low inventories set the stage for potential high prices across the country this winter,” commodity strategist Peter Helles said.

However, EBW Analytics said the storage deficit in the Midwest has actually shrunk during the last two months, a sign that even despite the addition of the Rover Pipeline earlier this year, and the expected addition of the 1.5 Bcf/d Nexus Pipeline later in 2018, regional local distribution companies feel more secure with gas inventories in the ground rather than relying on flows from new gas pipelines.

For the gas market, this may indicate stronger spot market demand for the late injection season than many expect. “On the other hand, stronger seasonal injections and higher inventories ahead of the winter may eventually reverse the increasing winter premium of the past two weeks, ultimately weighing on Nymex futures,” EBW CEO Andy Weissman said.

In the medium term, EBW expects to see the potential for price declines as the Atlantic Sunrise pipeline project enter service, production ratchets higher, liquefied natural gas maintenance begins and weather-driven demand declines.

In fact, easing temperatures may precipitate losses over the next week. Bespoke Weather Services said weather guidance remains supportive of cooling in the long range and more cool risks in the medium term.

“Additionally, confidence only continues to increase in cooler weather across the South and portions of the Southwest, with the Midwest the main battleground for now,” Bespoke chief meteorologist Jacob Meisel said. Confidence in cooler risks into week 3 also continues to grow with a strong Pacific/North American ridge.

Meanwhile, the market will also begin looking ahead to September weather outlooks, which are typically bearish because of lower temperatures. Already, early forecasts from Weather Decision Technologies and other leading meteorologists point to another warm, bearish fall season, Weissman said. In addition, there is increased risk of tropical storms and demand destruction during this time of year. Last year, such storms reduced demand by more than 100 Bcf, according to EBW.

“If this outlook comes to fruition, the combination of surging production and bearish weather may yield repeated large injections that loosen the market and send prices lower,” Weissman said.

AECO Lags, Northeast Winter Strips Surge

Most North America pricing hubs posted stout double-digit increases across the forward curve that were in line with the strength seen in the futures curve.

One stark exception was NOVA/AECO C, which saw only modest gains through the summer but then more substantial increases further out the curve. September edged up only 2 cents from Aug. 2-9 to reach $1.185, and the September-October strip rose 5 cents to $1.25, according to Forward Look. The winter 2018-2019 package was up 15 cents to $1.67, while the summer 2019 strip was up 8 cents to $1.59.

The relatively weakness at the front of the NOVA/AECO C curve comes as demand in Western Canada appears to be waning after being strong for much of the summer. Western Canada storage printed a 5 Bcf build for the week ending Aug. 10, according to Tudor, Pickering, Holt and Co. Inc. (TPH). The reported build was 1 Bcf larger than its estimate.

TPH analysts said maintenance on the Foothills portion of the Nova Gas Transmission Ltd. (NGTL) system has been limiting flow to around 90% of firm transportation nominations (0% interruptiple transport). This has resulted in a loss of about 0.2 Bcf/d of exports on Gas Transmission Northwest. The maintenance was scheduled to wrap up on Friday (Aug. 10), so analysts expected a bounce back in exports, which should provide incremental tightening to the market.

“Given the export restrictions, we're looking for a 6 Bcf build” to reflect data for the week ending Aug. 10, “still below norms of 7 Bcf,” TPH analysts said.

In Eastern Canada, storage inventories grew by 12 Bcf, double the five-year average of 6 Bcf and closing the storage gap to just 9% below the five-year average, TPH said. “This makes us wonder how much longer the Dawn premium will hang around. The current trend points to inventories pulling even with the five-year average by the end of injection season.”

Dawn September forward prices shot up 17 cents from Aug. 2-9 to reach $3.018, while the winter 2018-2019 strip rose 16 cents to $3.18, Forward Look data show.

Elsewhere in the Lower 48, Northeast points followed the lead of the Nymex with steep increases seen through the summer months. Regional pricing hubs broke off, however, when it came to the winter strip as storage concerns lifted winter prices by as much as 50 cents.

At the constrained Algonquin Citygate, September climbed 13 cents from Aug. 2-9 to reach $2.983, the September-October package jumped 19 cents to $3.00, and the winter 2018-2019 strip rose 34 cents to $7.94.

Points all along the Transcontinental Gas Pipe Line, aka Transco, also put up substantial increases. Transco zone 1 September was up 15 cents to $2.907, September-October was up 21 cents to $2.91 and the winter 2018-2019 was up 16 cents to $3.01, according to Forward Look.

At Transco zone 6-NY, September tacked on 13 cents to hit $2.683, September-October edged up 19 cents to $2.68 and the winter 2018-2019 jumped 50 cents to $6.15.

Low storage levels could lead to high natural gas prices in winter, especially if there is severe weather or extreme cold, BTU Analytics said. “Even as production in Appalachia grows, depleted storage reserves could result in incremental upward price pressure during cold spells, and an overall cold winter could result in prolonged price pressure and volatility,” analyst Katelyn Hesse said.

Remaining storage builds in the East need to average nearly 0.5 Bcf/d more than 2017’s pace from July through October to avoid setting a new five-year low, she said. Infrastructure and production can aid in that effort, noting that Rover’s remaining two laterals would allow for 0.85 Bcf/d of incremental production growth to help boost storage levels. “However, production gains following the completion of the Rover laterals may be limited.”

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