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NatGas Traders Fret Market Direction; Physical Markets Survive Permian Force Majeure

Natural gas physical prices and futures prices wrestled each other to the mat Tuesday to see which could put in the minimal price move. It was a close match, with the physical market and futures at about a tie.

The overall cash market added 3 cents to $2.35, with gains at most market points limited to a penny. The Northeast was up six cents and was the only region to move more than a nickel. May futures languished within a narrow 5-cent range and closed 1.9 cents higher at $2.530, and June was up 2.4 cents to $2.572. May crude oil added $1.38 to $53.29/bbl.

With spot futures at a 34-month low and pressing the low of April 2012 at $1.902, the question arises if sub-$2 gas is in the cards as traders are staring down the barrel of lofty production rates of as much as 72 Bcf/d. "Probably not," said Teri Viswanath, director of natural gas strategy at BNP Paribas.

She looks at 2012 as a framework for 2015 going forward. "Based on the 2012 trend in prices, when similar supply concerns surfaced, futures prices put in the calendar-low in April on exaggerated stock-build expectations...However, the days of sub-$2 prices that year were limited as cooling demand and fuel-switching restricted the build in inventories in May. Will the market extract a similar discount this year in the absence of obvious storage concerns? While we see more downside for prices, in our opinion, a replay of 2012 is probably not going to happen."

There may be more downside, but some are not willing to wait around to find out. Traders are willing to close out existing short positions as fundamentals in the short term may have taken the market as low as it can go.

"While fresh 34-month lows would usually be reinforcing our bearish opinion, we feel that the market is becoming stretched from fundamentals given a continued supply shortfall against average levels for this time of the year," said Jim Ritterbusch of Ritterbusch and Associates. "And while the deficit against five-year averages will likely be narrowing again per Thursday's EIA [Energy Information Administration inventory report], we feel that a sizable injection of at least 40 Bcf has likely been baked in. As far as production is concerned, we see a relationship between the stepped-up decline in oil rigs and associated gas production that could potentially offer a quicker output peak than generally anticipated.

"While we still look for the supply deficit against the averages to be erased, possibly as early as next month, we don't expect stocks to become burdensome as has been the case within the liquids. In other words, we can still envision some price strengthening back to a $3 handle amidst an early start to a hot summer that would crank up power demand in slowing storage builds. With this in mind, we have suggested accepting profits out of any short positions established last month within the $2.70-2.80 zone."

Market technicians are waiting for the market to make its next move, but they lean toward lower prices. "It's hard to believe the 'wild child' of the energy markets has been tamed," said Walter Zimmermann of United ICAP. "Everybody is a little worried that the market is not going to be this tame forever.

"The way I am looking at this is it is really, really, really, rally-or-else time for the bulls. My critical support for the May contract was $2.476 and it hit $2.475 in Monday's trading. We need to get a bounce here. We can't just sit like a bump on a log. Key support is not supposed to act like a magnet for the price action. If prices get stuck at key support, then it is not key support. It's just a bear market rest stop."

Time is running out for the bulls. "We should give it a few days, but by Friday if we haven't gained some distance on the upside from $2.476, then each additional day that goes by with no lift the case for bottoming action recedes with each additional day of congestion.

"There is a whole lot at stake here. The bearish case for natural gas is $1.49 to $1.53. All we can do is sit and wait for a rebound," Zimmermann said.

With the exception of a force majeure on NGPL Mainline, it was mostly "All Quiet On The Western Front" as physical prices struggled to move much more than a penny.

NGPL declared the force majeure due to a mainline failure just north of compressor Station 112 in Hutchinson County, TX. "As a result, NGPL must limit gas flowing northbound out of the Permian zone to the available capacity for gas flowing southbound into the Permian zone. This means that receipts and deliveries out of segment 8 must be equal in order to be scheduled. This force majeure event puts all transport services at risk of not being scheduled for the duration of the outage," said Erik Fabry of Genscape.

"I don't think there will be much market impact at all, but what this tells me is that nothing is flowing out of NGPL's Permian Zone."

Next-day prices in the area moved little. Gas on El Paso Permian rose 2 cents to $2.31.

Elsewhere, deliveries to the Algonquin Citygates gained 2 cents to $3.46, and New York deliveries to Transco Zone 6 rose 19 cents to $2.26. Parcels at the Henry Hub fell a penny to $2.55, and deliveries to PG&E Citygate rose a penny to $2.85.

Gas buyers across PJM won't get much help from renewables if near-term forecasts are correct. WSI Corp. in its Tuesday morning outlook said, "A cold front and a ripple of low pressure will bring a round of rain across the Mid Atlantic and southern PJM today into tonight. High pressure will nose in behind this front during Wednesday, but there will remain a chance of showers across southern and western areas. High pressure will slowly erode during the end of the week allowing a weak disturbance to bring an increasing chance of showers across the power pool. The chance of showers may linger across southern areas into the weekend. Period rainfall amounts may range 0.75-2 inches, highest south. Temperatures will generally range upper 50s, 60s and 70s.

"Weak wind generation is expected [Tuesday], but wind gen is expected to increase overnight into Thursday morning. Output may top out over 3 GW. Wind gen is expected to decrease and become light during the end of the week."

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