Natural gas forwards markets barely budged last week, rising just a couple of cents across the curve as the previous week’s dramatic fall appeared to necessitate a breather, while mixed weather patterns for the remainder of June left market players rather indecisive, according to NGI’s Forward Look.
Nymex futures led the way, with strength in the cash market leading to some gains early in the week for the prompt month. But unlike the previous week, which saw futures drop more than a nickel each day and a steep 17 cents on one day, last week’s action was far more muted. Tuesday was the only day in which the Nymex July futures contract climbed more than a nickel. Overall, July ended the June 2-8 period up only 3 cents at $3.03.
One reason for the lack of significant movement last week could be attributed to mixed weather patterns for the second half of June, with some weather models a touch cooler and others slightly warmer.
“It’s still a rather warm pattern, just not impressive,” NatGasWeather forecasters said. “This makes it difficult to determine whether the markets see it as barely hot enough, and possibly the reason for market indecision [last] week with prices little changed going back to [the previous] Friday.”
The second full week of June is expected to bring about some hot weather that will extend into Chicago and through the Northeast, as well as into the southern states. In fact, meteorologists at data and analytics company Genscape Inc. have continued to revise their cooling degree day (CDD) projections upward for the week, rising to an average of 46% above normal as of Thursday’s outlook.
Genscape has Lower 48 power burn rising to an average 31.2 Bcf/d, peaking last Tuesday at what is expected to be a summer and year-to-date high of 32.1 Bcf/d. Coincidentally, that matches the June 2016 daily average, the Louisville, KY-based company said.
“The main thrust of increased gas burns will be a product of heat hitting major population markets in Midwest, Northeast, New England and SEMA [Southeast/Mid-Atlantic]. Elsewhere, Texas will be mostly around normal,” Genscape said.
NatGasWeather said additional weather systems are expected into the central United States late in the week, but how much success they have advancing into the East thereafter is where the weather models differ.
Forecasters at New York-based Bespoke Weather Services said global weather models continue to trend less bullish, with a broad trough across the East in the long-range. European weather models also show an equally intense long-range eastern trough, but these show the trough breaking down by Day 15, indicating it would be short-lived enough to not signiﬁcantly limit heat. Canadian models, meanwhile, show heat dominating through with a strong southerly ﬂow remaining. So while the second half of June looks a bit unclear, the bias “still looks for cooling demand to be around to a bit above average through the next few weeks,” Bespoke said.
With demand coming in on the high side in the coming weeks, Bespoke said the market could quickly see some tightening occur as widespread heat arrives and storage injections shrink signiﬁcantly to smaller-than-average levels.
That was not the case last week, however. The U.S. Energy Information Administration (EIA) on Thursday reported the first triple-digit storage injection since September 2015, according to investment bank Tudor, Pickering, Holt & Co.
EIA reported a 106 Bcf build into storage inventories for the week ending June 2, lifting working gas in storage to 2,631 Bcf. Stocks were 332 Bcf less than last year at this time and 237 Bcf above the five-year average of 2,394 Bcf.
“This is the third number in a row showing that the balance is way different compared to the start of March/April and looser,” NatGasWeather said. “Having said that, the market promptly reacted after a couple cents sell-off and rebounded to reach $3.06 on the expectation of warmer weather and better S/D [supply/demand] balances.”
NGI’s Patrick Rau, director of strategy and research, said the fact that the 106 Bcf injection occurred during a period that normally sees the first week-over-week decline during a typical storage injection season is all the more disappointing.
Still, “the end of May marks the historical peak injection period, and average weekly injections of the previous five years all decline until the end of July, when the injections creep back up and form another cyclical high in late September, followed by a steady progress down from there,” Rau said.
The reported injection was at the top end of the range of expectations and more than the 94 Bcf average, according to Tim Evans of Citi Futures Perspective. "The build also suggests some weakening of the underlying supply/demand balance, although we note the reporting period did span the Memorial Day holiday, which may have had a one-time effect in suppressing commercial and industrial demand,” Evans said Thursday.
Early indications for the next storage report (for the week ending June 9) show a range in the upper 70s Bcf to low 80s Bcf.
Looking at the end of the traditional injection season, which runs through the end of October, analysts at Wells Fargo Securities LLC see inventories reaching 3,878 Bcf as they expect the market to remain undersupplied throughout the summer. While the end-of-season projection is essentially in line with the five-year average, it represents a 169 Bcf deficit to 2016, analysts said.
Diving into the forwards markets, most pricing hubs saw small gains similar to Nymex futures. For the period between June 2 and June 8, July forwards averaged 4 cents higher, while August, the balance of summer (August-October) and the winter 2017-2018 averaged 3 cents higher. The rest of the curves were up 2 cents or less.
California markets were one notable exception as strong demand has lifted prices there more substantially. At Southern California Border, July forwards rose 8.6 cents from June 2 to June 8 to reach $2.884, according to Forward Look.
The gains come as demand in the state is projected to rise in the next couple of weeks. Genscape shows demand averaging 5.894 Bcf/d for this week, up from the previous seven-day average of 4.74 Bcf/d. Demand the following week is expected to increase even more, to an average 5.94 Bcf/d.
The stronger gains at SoCal Border extended through the upcoming winter as the warm weather has ramped up the melting of snowpack in California, which is bullish for gas demand in the state.
SoCal Border August forward prices climbed 7 cents from June 2 to June 8 to reach $2.956, balance of summer (August-October) forward prices rose 5 cents to $2.90 and the winter 2017-2018 picked up 4 cents to reach $3.18, Forward Look data shows.
The PJM electric footprint (in the U.S. Mid-Atlantic) also offered some bullish supports for gas demand this summer, according to Genscape’s PJM power desk. PJM recently added 1,503 MW of gas-fired capacity and will add two more plants this year with a combined capacity of 1,870 MW (Oregon Clean Energy and Wildcat Point).
In addition, PJM supply brought in from the TVA’s Watts Bar 2 nuclear plant could remain suppressed as technical issues at the plant make its return date unknown, Genscape said.
As an aside, PJM will also see about 1,710 MW of nameplate coal (and one oil) capacity retire, but the utilization rates of those plants last summer were already quite low. One bearish factor for gas is wind. The PJM market continues to add new wind generation capacity, which is expected to push total wind generation in the market towards a new high near 2,500 GWh.
Still, gas production is also on the rise, with the bulk of this year’s gains coming in the second half of the year. Baker Hughes, in its June 9 report, showed three more gas rigs added to the U.S. rig count, bringing the number of rigs to 185.
Forward prices continue to reflect the bulk of that growth coming from the Northeast, but with plenty of uncertainty regarding a key pipeline’s in-service date. Dominion July forward prices inched up just 1.3 cents from June 2-8 to reach $2.153, August forwards prices were up 1 cent to $2.185 and the balance of summer (August-October) remained flat at $2.20.
Backed by commitments from Marcellus/Utica shale producers, Rover is scheduled to come online in two phases this year. Phase 1, including service to the Midwest Hub in Defiance, OH, is scheduled to start up in July; Phase 2, which includes an interconnect with the Vector Pipeline in Michigan, is scheduled for service in November. Backer Energy Transfer Partners LP has stuck to its original schedule for Rover despite a prolonged FERC review process.
But in May, the Federal Energy Regulatory Commission ordered Rover to stop all new HDD activities for the pipeline pending a third-party review of the company's handling of a 2 million gallon drilling fluids spill in a wetlands area near the Tuscarawas River in Stark County, OH.
Rover had asked to finish HDD crossings of Captina Creek in Belmont County, OH -- part of the Clarington Lateral -- and Middle Island Creek in Tyler County, WV -- part of the Sherwood Lateral. But FERC denied this request, instead authorizing Rover to "remove the drill stem from the borehole at the Middle Island Creek HDD and to install a casing to prevent the hole from collapsing," while denying the company’s request to continue drilling at the two sites.