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April NatGas Futures Expire Higher as May Contract Struggles to Maintain Gains  

A flurry of buying interest and strength in spot natural gas prices sent Nymex April futures up 10 cents between March 24 and 29 to expire at $3.175. May futures, meanwhile, are desperately trying to maintain that momentum, creeping up just 4 cents through March 30 as generally bearish sentiment continues to pressure the gas markets.

“Prices remain near $3.20 in overnight trade as it appears bulls and bears are battling for control of this level as prices have had an affinity for returning towards it,” weather forecasters at NatGasWeather said Friday morning.

Indeed, May futures traded sideways much of the day as the most recent weather data showed a mix of cool and mild weather through mid-April.

Overnight Thursday, minor changes in the weather data showed a swing to cooler the next few days as strong spring storms track across the country, NatGasWeather said. Then, however, a milder break is expected to follow through the middle of the week. By the end of the week, a cold shot is forecast for the north-central United States, which will drop temperatures to near or below freezing over many eastern U.S. regions, including deep into the South.

“It’s this storm that has maintained cooler trends the past couple days to add several [heating degree days] HDDs to push nat gas demand back to stronger-than-normal levels April 6-9th,” NatGasWeather said.

A several-day break is favored to follow over the East April 10-12, easing national natural gas demand back below normal, but with cooling then expected to gradually spread back across the region April 13-15. “Thus, overall, a steady barrage of spring weather systems will impact the U.S. through mid-April in what we view a rather neutral pattern when averaging swings between mild and cold conditions,” the forecaster said.

But forecasters at Bespoke Weather Services said production levels remain low enough -- at around 70 Bcf/d -- that even with less supportive weather, storage data during the next few weeks does not look to be all that bearish.

The U.S. Energy Information Administration reported a 43 Bcf withdrawal from storage inventories for the week ending March 24. The draw was in line with market expectations and left stocks at 2,049 Bcf, 423 Bcf less than last year at this time and 250 Bcf above the five-year average of 1,799 Bcf.

Bespoke said the print next week (for the week ending March 31) is likely to be the most bearish, as the market could see a modest storage build in a week that typically sees a small storage draw. Following that, however, the market should expect to see injections right around the five-year average.

“Heading into the heart of the shoulder season with the level of tightness we currently have, it is hard not to see risk still skewed to the upside,” New York-based Bespoke said.

Some of this tightness is aided by the colder weather trends that are forecast for the coming week or so. In fact, Bespoke said all model guidance has continued to trend stronger with this cold shot, with at least one model now showing it enough to pull weather-driven demand above average through the next 15 days.

The other trend has been for more trough risk across the center of the country in the long range as any lingering Niña-like atmospheric state breaks down, and conditions begin to gradually trend towards a more Niño-like state.

“Initially, this looks bullish or supportive, but moving into later April with such cooler risks may begin to limit cooling demand. For now though, the market looks tight enough for the May natural gas contract to wander up towards the $3.3 level today,” Bespoke said Friday morning.

The May futures contract traded in a tight 8-cent range Friday before ultimately settling at $3.19, down one-tenth of a penny from Thursday’s finish.

“We view mid to late April as being a nice test to see just how tight the background state is,” NatGasWeather said, adding that if weekly storage builds were to come in lighter than normal several weeks in a row, this would set a bullish tone for when summer heat arrives as the expectation would be for surpluses to quickly transition to growing deficits.

Wells Fargo natural gas analysts agreed tighter supply/demand fundamentals over the summer would put upward pressure on near-term gas prices. “Our analysis indicates that the natural gas market is currently 2 Bcf/d undersupplied, and in order to reach reasonable storage levels by the end of injection season in early November, some power demand must be destroyed by natural gas-to-coal switching,” the bank said Thursday.

Wells Fargo’s latest natural gas price forecast calls for $3.30/MMBtu, $3.50 and $3.40 in 2Q17, 3Q17 and 4Q17, respectively, which is approximately 9% above consensus on average. The bank forecasts an aggregate storage inventory build of 1.746 Tcf (compared to the five-year average of 2.092 Tcf), and views peak storage levels entering withdrawal season at 3.814 Tcf, 66 Bcf below the five-year average.

Beyond weather and storage, it appears the market is looking to exports as a demand driver to keep prices elevated, NGI Director of Strategy and Research Patrick Rau said. Three new intrastate pipelines to Mexico are providing roughly 3.0 Bcf/d of takeaway capacity from Waha, and Train 3 at Cheniere’s Sabine Pass is about to go into service very shortly, which is another 0.6 Bcf/d or so.

“We estimate that Mexico export pipelines average a bit more than 50% utilization, so if that holds, that's 1.5 Bcf/d to Mexico, and if Train 3 runs even at 75% of capacity, that's another 0.4-0.5 Bcf/d of demand. Call it 2.0 Bcf/d in total incremental demand, with no real short-term production response to match,” Rau said.

Indeed, production continues to hover around 70 Bcf/d, but meaningful production gains are expected to hit the market in the second half of the year, Rau said. Meanwhile, high gas prices through the summer won't help coal-to-gas switching. “Both of those things means storage could be higher than the five-year average going into next winter,” Rau said.

Taking a look at natural gas forwards across the country, the majority of pricing locations followed the lead of the Nymex futures curve. The Nymex May futures contract rose 4 cents from March 24 to 30 to settle at $3.19, while June edged up 3 cents to $3.26, the balance of summer (June to October) tacked on 2 cents to $3.31 and the winter 2017-2018 climbed 2 cents to $3.48.

Nationally, May forward prices were up an average 4.5 cents during that time, while prices for June and the balance of summer were up 4 cents on average. The winter 2017-2018 forward strip was up 2 cents on average, according to NGI’s Forward Look.

California prices, meanwhile, continued to be pressured by a strong influence of renewable energy in the region. Data and analytics company Genscape Inc. anticipates above-normal levels of precipitation across the West Coast, stretching from central California to northern Washington. Based on this forecast and with current snowpack levels already well above normal, the company expects strong, potentially record-breaking hydro generation in California and the Pacific Northwest through the spring and early summer.

“With this cheap power available to meet baseload, natural gas plants throughout the Western Interconnection that typically run around the clock will likely be priced out with increasing frequency. However, natural gas peakers will continue to be relied on to provide additional power during times of peak demand,” Genscape said.

Meanwhile, solar generation continues to grow throughout California. Due to recent additions, utility-scale capacity now exceeds 10 GW while behind-the-meter capacity nears 5GW. Behind-the-meter capacity produces power intended for on-site use in a home, office building, or other commercial facility. The location of the solar system is literally “behind the meter”, on the owner’s property, not on the side of the electric grid/utility.

The added solar capacity impacts power prices not only in California, but throughout the entire Western Interconnection, Genscape said. In an area stretching from Wyoming to Arizona, it is now becoming commonplace for power prices to fall into negative territory during peak solar hours, it said.

The California ISO will likely be curtailing solar generation with increasing frequency due to limitations on the transmission system and in order to maintain grid stability. However, Louisville, KY-based Genscape expects that many natural gas units will have to cycle off during the midday due to loading orders and the fact that it is simply not as economical for gas plants to run through such weak pricing.

Meanwhile, California wind generation is also expected to be strong this spring, running about 10% above normal. And with forecasts calling for normal temperatures in California and the Southwest and just slightly above-normal temperatures in the Pacific Northwest, Genscape sees little upside risk to power demand in the coming months.

Forwards markets appear to be taking the bearish headwinds into account. At Pacific Gas & Electric City-gates, May forward prices slipped 2.2 cents from March 24 to 30 to reach $3.24, while June slid 1 cent to $3.28. The balance of summer (June-October) also was down 1 cent to $3.405, according to Forward Look.

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At Southern California Border, May forwards were down 1.3 cents during that time to $2.83, but June edged up a penny to $2.93, while the balance of summer picked up two cents to reach $3.07.

Southern California prices are likely getting some support from ongoing restrictions at the Aliso Canyon storage facility, with the facility still unavailable for injections and only used for withdrawals in emergencies. The pipeline is also conducting extensive modifications to its other three storage facilities, which has decreased storage operating capacity since the beginning of March, Genscape said.

Meanwhile, growing upstream natural gas demand in the Desert Southwest and Mexico also are likely supporting the market. “Increasing capacity for exports to Mexico has the potential to siphon off gas from the Southwest before it reaches the Golden State, meaning that California’s prices may feel increased upward pressure to compete with Mexican demand,” Genscape said.

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