For the second day in a row physical and financial natural gas values tumbled to weather-driven double-digit declines.
Natural gas cash for Wednesday delivery traded unchanged or sharply lower at all but one market point, and the NGI National Spot Gas Average shed 16 cents to $2.97. New England points took the greatest hits, but major trading centers from coast to coast came in sharply lower.
Futures prices couldn't get out of their own way either as longer-dated forecasts also showed considerable moderation. At the close, March had dropped 11.5 cents to $3.117 and April had given up 10.6 cents to $3.165. March crude oil added 18 cents to $52.81/bbl.
Selling started in earnest as March futures were called 6 cents lower at the open as overnight near-term weather models showed significantly warmer conditions in eastern energy markets.
"Sizeable day-to-day changes were made to the six-10 day period forecast," said WSI Corp. in its Tuesday morning report. "The eastern two-thirds of the CONUS are much warmer than previous forecast, especially for days seven through nine. The West and adjacent portions of the central U.S. are much colder by days seven to 10. The warmer changes offset the cold ones, so CONUS GWHDDs are down 9.6 to 121.5 for the period.
"The forecast has risks in either direction at this point given the inconsistency with the models the past few days and with inherent uncertainty with a storm system during the period, which could have a sharp contrast in temperatures. With that said, operational models offer a warmer risk over the East and a colder risk over the West and portions of the central U.S."
Analysts are beginning to question if there is any meaningful cold out to the end of February. "The sharp price selloff that is into its fourth day is being sustained overnight by continued comparatively mild temperature views that shifted significantly over the weekend," said Jim Ritterbusch of Ritterbusch and Associates in a Tuesday morning note to clients.
"These outlooks that are starting to stretch toward mid-February, are beginning to favor a renewed storage surplus situation that could remain intact through most of February. While non-weather factors continue to tilt bullish in accentuating weekly storage withdrawals, weather at this time of year tends to be the overriding driver of price and until another shot of arctic air moves down into the Midcontinent, this market could have difficulty piecing together a meaningful price advance."
Ritterbusch cautions that "temperature views can change quickly, and we feel that the next indication of a cold event could easily spike values back up to around this month's high of about $3.50-3.55."
A favorable weather spike notwithstanding in the short run longer term market dynamics are seen favorable. Higher capital spending encouraged by producers capitalizing on recent higher prices by implementing a higher level of hedging has limited market exposure for those savvy enough to minimize price risk. Prices are also seen higher than previous estimates for 2017, 2018 and 2019.
"Emboldened by a stronger commodity tape and a firmer outlook for crude post OPEC's November meeting, the ramp in rig activity is clearly underway," said David Tameron, an analyst with Wells Fargo Securities.
"In fact, aggregate rig count has been flat or up in 32 of the past 36 weeks and we believe rig adds are likely to continue as operators focus on ramping production in 2017." Horizontal rig additions alone "are projected to increase to over 600 by 2018 from a bottom of 238 in mid-2016.
"2016 came to a close with temperatures substantially below average, driving a 642 Bcf storage withdrawal over the last four weeks of the year, which meaningfully surpassed the five-year average withdrawal of 374 Bcf. The massive withdrawals pushed natural gas prices as high as $3.93/MMBtu (front month) and provided E&Ps with an opportunity to hedge 2017 production at over $3.60/MMBtu.
"We believe to some extent this has already started to show up in 2017 natural gas hedges, which are currently at 47%, a 10% [volume] increase from our prior true-up."
According to Tameron, prices are expected higher than earlier forecasts.
"We have updated our natural gas forecast which is now $0.09 above [Bloomberg] consensus in 2017 and 9% above consensus in 2018. We are also introducing our 2019 forecast of $3.31/MMBtu."
Tameron forecasts a 2017 natural gas price of $3.26, up from earlier estimates of $3.12, a consensus of $3.17, and 2016's $2.48. 2018 is seen at $3.41, down from $3.50 but above consensus at $3.13.
In physical market activity Northeast next-day gas was down more than a half-dollar at some points. AccuWeather.com predicted that the Tuesday high in Boston of 32 would reach 43 Wednesday and slip back to 38 on Thursday, still 2 degrees above normal. Chicago's high Tuesday of 42 was seen sliding to 36 Wednesday and 28 by Thursday, 4 degrees below normal. Dallas' high temperature Tuesday was expected to reach a balmy 78, ease to 73 Wednesday, before finally falling to 59 Thursday, 1 degree above normal.
It's been a warm January. AccuWeather.com said Boston had received 919 heating degree days (HDD), or 83% of normal, and Chicago had experienced 1,038 HDDs, or 81% of its usual accumulation. Dallas had posted just 491 HDDs, or 73% of normal.
Major market centers were also down hard. Gas at the Chicago Citygate fell 12 cents to $3.01, and gas at the Henry Hub shed 20 cents to $3.00. Gas on Panhandle Eastern fell a dime to $2.84, and gas delivered to Transwestern San Juan came in 17 cents lower at $2.83. Packages at the PG&E Citygate dropped by a dime to $3.45.