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NatGas Cash, Futures Ease; Analysts Mull Rebalancing Market

Physical natural gas for Wednesday delivery fell in Tuesday's trading as temperature forecasts and estimates of heating load offered little in the way of incentives to purchase incremental volumes.

Modest gains in the Rockies, Midcontinent, West Texas and California were unable to offset steeper declines in the Marcellus and eastern points. The NGI National Spot Gas Average fell 6 cents to $1.67, with the East sliding nearly 20 cents. Futures settled lower by an almost equal amount. At the close, March had retreated 3.9 cents to $1.782 and April was off 3.3 cents to $1.829. April crude oil skidded $1.52 to $31.87/bbl.

Short-term traders see natural gas being tugged lower by falling petroleum prices. "Everything is down. The heating oil, RBOB, and crude are all dragging natural gas with it," said a New York floor trader. "I'm looking at $1.69 to $1.70 support, but this is not a common area. There are not a lot of people used to these prices.

"It's hard to figure out. I would say it's too risky to play the short side. What if you get a real cold snap? You want to do that? Who plays the short side in the winter?"

From an analytical standpoint, natural gas remains an unbalanced market, and the question is how do you bring it back into alignment and in what time frame; 2016 looks to be a challenging year, analysts say.

"You are seeing a rebalancing every week with the rig count shutting down," BTU Analytics Managing Director Tony Scott told NGI. "When you go through the quarterly earnings announcements you see that strategies have clearly changed from 2015 when operators were keeping rigs in the field and drilling but not completing wells and building an inventory.

"Week to week, I think we will see drilling activity fall off as $30/bbl oil does not incentivize a lot of activity, and even plays with a lot of gas volumes like the Eagle Ford and Permian aren't seeing any uplift from gas prices either."

Scott sees pervasive production declines setting in. "A good example is Southwestern Energy, who was keeping three rigs active in the Fayetteville but shut that down in December. Exxon has shut down; BHP has shut down, and the Fayetteville is now in decline.

"By the end of the year you have declining production in all basins except the Northeast. So then it's a question of how much pipeline capacity gets built out of the Northeast in 2016 versus production declines and demand growth.

"Increased demand and declining production should stave off a really bad storage number at the end of 2016. We look for storage to end at 3.8 to 4.0 Tcf, but you are at a lower production level outside of the Northeast. The Northeast has a lot of productive capacity, but the difference between 2016 and 2015 is that operators have announced plans to slow down activity. Producers in the Northeast are shifting to much lower drilling and using the backlog of wells they have developed over time to meet their pipeline commitments as well as keep their production volumes up.

"A normal winter for 2017 would be a big boost compared to what we have seen this year and will be with a supply picture that is not as robust. You could see a potentially sharp response in price since the dynamic is moving to a tighter market. That should provide incentive to move back into the historic gas plays," Scott said.

In the near term, however, analysts see both supply and demand factors failing to offer any suggestion of higher prices amid a speculative community ready to pounce on the short side of the market. "At the end of the day, forces of both the supply and demand variety appear deserving of bearish check marks through the balance of this HDD cycle, with supplies beginning the injection period by early April at an unusually high level with the exception of three years ago," said Jim Ritterbusch of Ritterbusch and Associates in a report to clients.

"As a result, this market would appear set up for a weak pricing environment across the shoulder period until the CDD factor begins to come into play. As a result, we see physical values spending much time south of the $2 mark, and we are not ruling out an eventual drop in Henry Hub pricing into the $1.60s sometime next month depending upon temperature updates.

"In view of these expectations, we see contango expansion ahead, with weak spot pricing weighing on nearby contracts with some expected price-induced production decline driving support into the summer-fall months that will also be demanding premium to account for weather uncertainties related to both temperatures and hurricanes. And as carrying charges stretch, the large speculative entities will find reason to gravitate further into the short side of the market as current favorable roll yields become even more attractive. We were surprised by the sizable decline in net short holdings during the latest COT reporting period, and we see plenty of latitude for renewed entry into various bearish strategies by the speculative community."

Weather model runs changed little overnight, and forecasters are expecting risks to the warmer side, according to Commodity Weather Group in its Tuesday morning report. "While all models came in warmer overnight than their prior runs (and generally warmer than yesterday morning), there are still fairly big differences between the American and European for the six-10 day window, with the European ensemble now much warmer from coast to coast and the American still threatening some colder weather around the Great Lakes with only a near-normal East and South.

"Strangely, despite bigger disparity on the six-10 day, the three ensemble options (Euro, American, Canadian) are fairly similar in the 11-15 day with a slightly cooler Midwest (seasonal/below) and near-normal East and South. Based on external factors that favor stronger El Nino atmospheric response (very negative Southern Oscillation Index and positive global wind), we continue to believe that warmer risks are still stronger than colder ones overall. Any colder threats would likely be shorter-lived too," said Matt Rogers, president of the firm.

Near-term data from the National Weather Service (NWS) show an expected warming trend as well. In its forecast for the week ending Feb. 27, NWS shows below-normal heating requirements for major metropolitan areas. New England is expected to see 196 heating degree days (HDD), or 54 below normal, and the Mid-Atlantic should have 193 HDD, or 38 below its normal tally. The greater Midwest from Ohio to Wisconsin is anticipated to have 226 HDD, or 19 below normal.

In physical trading Marcellus points took it on the chin as most market points outside the East experienced only nominal losses. Gas on Dominion South for Wednesday delivery fell 17 cents to $1.08, and packages on Tennessee Zn 4 Marcellus came in 12 cents lower at 98 cents. Deliveries to Transco-Leidy Line tumbled 15 cents to $1.01 cents.

Gas on Tetco M-3 shed 19 cents to $1.13, and gas bound for New York City on Transco Zone 6 changed hands 12 cents lower at $1.71.

Hubs outside the Northeast were largely steady. At the Chicago Citygate next-day gas added a penny to $1.86, and at the Henry Hub gas changed hands a penny lower at $1.83. At Opal next-day parcels were quoted at $1.64, up 2 cents. At the Algonquin Citygate, however, Wednesday volumes plunged $1.14 to $1.68.

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