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Natural Gas Futures Lose Steam, but Bears Have Plenty to Prove; Spot Market Slides

A roughly 20-cent rally in the front month going back to Aug. 2 showed signs of running out of steam Friday as prices pulled back around a penny, but recent gains suggest the burden of proof has shifted to record production to show it can meaningfully work down inventory deficits before winter.

Spot prices posted widespread declines ahead of the weekend, especially in Southern California and the Desert Southwest, where recent heat-driven premiums left prices with more room to fall; the NGI National Spot Gas Average tumbled 23 cents to $2.92/MMBtu.

After rallying throughout the week, the September Nymex contract shed 1.1 cents Friday to settle at $2.944, trading in a fairly narrow range from $2.917 to $2.955. October settled at $2.949, down 1.0 cents, while January dropped 1.1 cents to settle at $3.151.

In terms of technicals, analysts with Societe Generale noted Friday that the October contract is “slowly inching toward the upper bound of the recent broad range at $3.00/3.02, the graphical levels consisting of October 2017 and June 2018 highs. With daily stochastic at a horizontal resistance, a definite close above $3.00/3.02 will be needed for an extension in the up move.

“In such a scenario, next objectives will be at $3.06 and $3.10 initially,” the Societe Generale analysts said, with $2.89 serving as “immediate support” and $2.79 offering “near-term support.”

On the weather front, data as of Friday was “a touch cooler trending overall the past 24 hours,” with “weather systems consistently finding flaws in hot high pressure that tries to strengthen over the northern and eastern U.S. in the weeks ahead,” NatGasWeather said. “It’s still a very warm pattern, especially over the western and southern U.S., just not as hot as needed over the northern half of the country with consistent intrusions of showers and minor cooling.

“...Overall, we continue to view weather patterns as neutral, although approaching slightly bearish compared to what the data showed a few days ago,” the firm said. “Prices remain within striking distance of $3,” but taking out $3, “might require hotter trends. Going forward, it’s up to record production to finally begin reducing deficits...no change until deficits begin easing considerably, as any moderate selloffs are likely to find buyers.”

The EIA reported a 46 Bcf build into storage inventories for the week ending Aug. 3. Lower 48 inventories stood at 2,354 Bcf, 671 Bcf below last year and 572 Bcf below the five-year average. The deficit to year-ago levels shrank by 17 Bcf, while the deficit to the five-year average grew by 7 Bcf.

“Compared to degree days and normal seasonality, the 46 Bcf injection is about 1.0 Bcf/d tight versus the five-year average,” Genscape Inc. senior natural gas analyst Rick Margolin said.

Genscape’s preliminary estimate as of Friday showed an injection of 39 Bcf for the upcoming week’s report, a figure that would continue to widen the year-on-five-year deficit, Margolin noted.

“While we do show production holding above the 80 Bcf/d 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,” Margolin told clients Friday.

Genscape’s initial storage estimate for the next EIA report “is very early, and is not our composite estimate, which is considerate of our storage sample,” he said. “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 the period.

Against a backdrop of storage deficits, the past week presented some favorable macro developments for natural gas bulls, according to analysts with Tudor, Pickering, Holt & Co. Inc. (TPH).

“Despite U.S. production migrating higher (plus 350 MMcf/d week/week), demand has proven resilient due to prolonged warmer-than-normal temperatures,” TPH said. “Natural gas bears lost some arrows in their quiver after the probability for a winter El Nino has lessened and 4Q2018 startups for Corpus Christi Train 1 and Sabine Pass Train 5 (a combined 1.2 Bcf/d of capacity) have been guided to by Cheniere Energy Inc.”

“Though this likely doesn’t translate to incremental demand, it will likely be a boon for sentiment,” the TPH team said. “Simply put, a Northeast production ramp is still expected, but time is quickly running out to backfill the storage deficit.”

Looking at the potential for Corpus Christ and Sabine Pass Train 5 liquefied natural gas exports, TPH said it doesn’t expect 100% utilization by the end of 2018 but that demand from the additional export capacity should start to show up by early 1Q2019.

In the spot market, discounts on deals for weekend and Monday delivery were widespread, including in the populated Northeast, as more moderate temperatures were expected to sweep through.

“Several weak weather systems/boundaries will trigger areas of heavy showers and thunderstorms through the weekend, focused over the southern and east-central U.S., but more importantly cooling major Northeast cities into the more comfortable 80s instead of 90s,” NatGasWeather said Friday. “There’s expected to be a weather system spin up and stall over Texas and the Southwest the next several days with heavy showers and cooling, then slowly ejecting as” the upcoming week progresses.

Tennessee Zone 6 200L dropped 5 cents to $2.74 Friday, while Transco Zone 6 New York gave up 7 cents to $2.94.

In the West, recently elevated points in California and the Desert Southwest sold off sharply heading into the weekend, led by the mercurial SoCal Citygate, which averaged $10.42, down $5.39 on the day.

SoCal Border Average tumbled $3.35 to $5.82, while in Arizona/Nevada, Kern Delivery plummeted $6.47 to $7.66.

Radiant Solutions was calling for temperatures to moderate slightly in Southern California over the weekend, with highs in Burbank expected to drop from the low-90s Friday down to the upper 80s by Monday.

Intercontinental Exchange indices for power delivered Sunday and Monday showed peak prices falling off sharply in Southern California and Desert Southwest markets. Meanwhile, Southern California Gas Co. was forecasting the typical weekend drop in demand on its system, anticipating sendout to total around 2.1 million Dth/d Saturday and Sunday after reaching close to 2.8 million Dth/d on Thursday.

Further upstream in West Texas, prices fell, outpacing declines in East Texas and at benchmark Henry Hub. Waha dropped 16 cents to $1.88.

Meanwhile, in the Rockies, planned maintenance on the Ruby Pipeline in the week ahead could reduce flows west to California by as much as 500 MMcf/d, according to Genscape analyst Joe Bernardi.

“Ruby plans to conduct its annual Roberson Creek Compressor test on Tuesday, which will limit operational capacity at the ‘ROBERSON CREEK - WY/UT ST LINE’ throughput meter to zero for the first three cycles, and to 931,000 Dth/d for the last two cycles,” Bernardi said. “The previous month has seen an average flow of 481 MMcf/d. Last year’s iteration of this annual event had the exact same capacity reduction, and end-of-day flows came in at 126 MMcf/d.

“This will disrupt gas moving from Ruby onto PG&E’s Redwood Path, and similar past events have resulted in a spike in Gas Transmission Northwest’s (GTN) deliveries to PG&E to accommodate for the drop in Ruby receipts,” according to Bernardi. “PG&E will also have the option to source alternative gas by increasing storage withdrawals, but typically these have not reacted as strongly to the Ruby flow cut as have GTN’s deliveries.”

In 2015 and 2016, the maintenance event corresponded with short-term spikes at the Malin hub, but not in 2017, while PG&E Citygate has not historically reacted to the event, Bernardi said.

Malin dropped 10 cents Friday to $2.60, while Stanfield gave up 7 cents to $2.52.

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