Physical natural gas for next-day delivery and futures elected to go their own ways in Tuesday trading; most points traded within a few pennies of unchanged, and futures traders elected to buy, figuring forecasts of recent cool were already baked into the market.
The Northeast and Appalachia showed the greatest weakness and the NGI National Spot Gas Average eased 2 cents to $2.68. At the close, August had risen 4.5 cents to $2.944, and September was up 4.9 cents to $2.931. September crude oil gained $1.55 to $47.89/bbl.
Despite the 7-cent plunge Monday, analysts see bulls in control. "For natural gas, this week the bulls own the place. Mostly. As the heat index rises, so goes gas demand, which most in the market see as staying firm through August," said Scott Shelton, broker analyst with ICAP Commodities. "The 2016 storage overhang has quickly eroded this season and could be nearly nil by Labor Day. Forecasts now show gas demand bumping upwards of 2.1 Bcf or more every day this week, thus pushing the daily average to over 35-plus Bcf per day.
"...Oil and natural gas prices may increasingly trade in opposite directions for the balance of the year, as higher oil prices would certainly mean a lot more associated gas production." Shelton pointed to the Permian Basin, where gas production could rise from an estimated 6.7-Bcf/d currently to almost 10-Bcf/d by year-end 2020, even at $50/bbl oil. "This would lead to a more modest call on dry gas production than if associated gas production weren't as strong," he said.
The recent decline was due to profit taking, says John Woods, president of J J Woods & Associates. "We are back above $2.90 and I expect another push up," he told NGI. "You still have all of August, and that's what people don't get.
"Right now the market is giving you a gift to get long. I am looking for another 15 cent move upwards, minimum. The market is telling you here is 15 cents, come and get it. What's the alternative? The market's not going to go sub $2.80 during the hottest month of your season."
August natural opened 3 cents higher Tuesday morning at $2.93 as traders saw the near 15-cent loss of weather premium over the last two sessions as adequate for the moment.
Traders see a moderate front half of August priced into the market with Friday and Monday's combined 14-cent swoon, but any further advance will need some sustained hot weather thereafter. "We see the dynamic of supply surplus contraction intact through a couple more EIA [Energy Information Administration] releases that will be providing some background support," said Jim Ritterbusch of Ritterbusch and Associates in a morning report to clients. "But, at the same time, the market will require a shift in the forecasts back toward some broad-based hot temps next month if price advances are to be sustained. With the summer gradually winding down and with September futures acquiring prompt month status at week's end, the weather factor will become less impactful."
He added that "the recent sharp reduction in the supply surplus will sensitize the market to any unforeseen supply disruptions that could emanate from tropical storm activity into the Gulf of Mexico, pipeline mishaps, etc. We will also note that production has been slow to respond to the dramatic increase in the rig counts during the past year and with the pace of growth in the rigs showing signs of plateauing, the production factor would appear deserving of a bullish designation."
Northeast and Appalachia day-ahead prices took the biggest beating in Tuesday's trading amid rising production and limited regional demand.
The familiar signs of Appalachian bottlenecks are resurfacing as more supply comes online and the region's next great hope for new takeaway -- Energy Transfer Partners LP's 3.25 Bcf/d Rover Pipeline -- continues to encounter regulatory trouble.
After narrowing the gap on Henry Hub earlier this year, Appalachian bellwether Dominion South has struggled mightily since the start of the summer. Trading at a negative 22-cent differential to Henry Hub as recently as May, deliveries to Dominion South sold for $1.77//MMBtu Tuesday, down 8 cents on the day and good for a $1.19 discount to Henry Hub, which held flat at $2.96.
Data from analytics firm PointLogic Energy indicates Northeast production has climbed steadily over the last few months, roughly tracking with the widening basis differentials. After averaging just under 23 Bcf/d in March, Northeast modeled dry natural gas production hit a recent high of 24.4 Bcf/d on Sunday (July 23). Northeast power burn, meanwhile, has entered a lull in the last few days, falling to 7.1 Bcf/d Tuesday from 10.4 Bcf/d last Thursday (July 20), a 30-day high, according to PointLogic.
Forecasters are calling for a warm west and cool east with a return of warmth to the East. Natgasweather.com in its morning eight- to 15-day outlook said, "The western, central and southern U.S. will be hot with highs of upper 80s to 100s due to strong high pressure. Weather systems will sweep across the east-central U.S. early in the outlook with showers and cooling, then warming after.”
The National Weather Service (NWS) is forecasting reduced cooling loads in Midwest and eastern markets. For the week ended July 29 NWS forecasts New England will see 31 cooling degree days (CDD) or 14 fewer than normal. New York, New Jersey, and Pennsylvania are expected to experience 60 CDD or just 1 greater than average, and the greater Midwest from Ohio to Wisconsin is anticipated to endure just 65 CDD or 7 greater than its seasonal tally.