Traders of physical natural gas for weekend and Monday delivery had to not only deal with the normal tendency of buyers to only reluctantly do three-day deals when cell phones and laptops let them buy gas instantly, but also the uncertainty surrounding the impact of Hurricane Harvey on near-term supply.
Declines were widespread, with losses in play from the Rockies to New England. California did manage to trade flat, however, but the NGI National Spot Gas Average imploded 13 cents to $2.56.
Futures traders attempting to balance supply disruption or demand destruction from the impact of Hurricane Harvey opted for the latter, and at the end of the day September retreated 5.7 cents to $2.892, and October fell 5.8 cents to $2.924. October crude oil added 44 cents to $47.87/bbl.
In its 4 p.m. CDT report the National Hurricane Center (NHC) reported Harvey’s sustained winds had increased to 125 mph and it was located 60 miles east southeast of Corpus Christi, TX., heading to the northwest at 10 mph.
Harvey was a Category 3 hurricane and some additional strengthening was possible before it makes landfall overnight. Weakening was expected over the weekend while the center moves inland over Texas, NHC said.
Gas buyers over the broad ERCOT power pool will have their hands full balancing potential outages, flooding and wind generation. "Tropical storm and hurricane conditions will be possible over southeastern portions of the pool associated with Hurricane Harvey this weekend," said WSI Corp. in a morning report to clients. "This will include frequent, torrential showers and thunderstorms resulting in flooding rains. Amounts of 15 to 25 inches may be a conservative estimate for many areas near the coast.
"Certainly any strong winds which occur, especially close to the coast, could cause widespread power outages. Furthermore, conditions may not notably improve overall until around the middle of next week as the system only slowly meanders northward...well inland, over the northern and western parts of the pool, showers and storms will be more scattered with less significant although still locally substantial rainfall. Only the most western portions of the pool will tend to escape with more isolated activity.
"Peak wind outputs over the West should be in the 4-6GW range nearly each day. There is a chance for strong wind generation South but the tropical system, if severe enough, may also cause generation plants to be closed. Solar will be fair west and low east through the period," WSI said.
Throughout the day Friday, reports rolled in of production losses and pipeline constraints due to Hurricane Harvey, but in a stark contrast to years past, the drop in the September contract showed a market hardly sweating the forecasts.
"I think what we've been experiencing over the last several years is that hurricanes now are kind of bearish, because they have more impact on lowering demand than lowering supply," Tom Saal of FC Stone Latin America told NGI Friday. "There will be some gas shut in, but it's probably temporary. The demand for sure is going to be lower."
Added Saal, "It's not down 30 cents. It's not up 30 cents. It's not a huge move here. It's trading where we were trading on Monday. So far it looks like the marginal impact is slightly bearish.
"...I think the market A, realizes there's going to be a reduction in supply and B, realizes there's going to be a reduction in demand. We just don't know how much it's going to be for either one of those. The price is not overreacting. Yet."
The Electric Reliability Council of Texas (ERCOT) is predicting storm damage extending through the South, South Central and Coastal weather zones in the ERCOT region. This includes the cities of Houston, Corpus Christi, Brownsville, Austin and San Antonio. The grid operator is already lining up additional repair crews from out of state.
Societe Generale said Friday that "perhaps most impactful is that Hurricane Harvey is expected to stall in Texas over several days, which could lead to severe flooding in portions of the state and materially hinder the pace of recovery, both supply and demand, following the storm's dissipation.
"Our current expectation is that the storm will be slightly more detrimental to demand than it is to production, meaning we see the price impact as being relatively neutral, at least until there is better visibility around the storm's wake of destruction. Given that Hurricane Harvey is making landfall over the weekend, this could lead to very active trading on Monday."
PointLogic Energy forecast a drop in cooling demand as the storm hovers over Texas.
"...Scattered showers and gusty winds from outer rainbands will impact the southern half of the Lone Star State throughout the day with the core of the system moving in overnight," PointLogic said Friday. "As a result, high temperatures across rain-cooled areas of this very significant demand region will only be in the low-80s, which will be upwards of 10 degrees cooler than average, while the northern half of the state will see similar conditions due to the entrance for a cool frontal boundary coming in from the north."
Genscape Inc. said key interstate pipes supplying flows across the border via NET Mexico were seeing reduced nominations Friday after declaring force majeures on Thursday due to the storm. TGP cut flows south out of Agua Dulce, TX, by 502 MMcf/d for timely nominations Friday.
"An overlap between maintenance occurring on the pipe and impending Hurricane Harvey led TGP to evacuate personnel performing maintenance in the area," Genscape said. "As a result, all flow through Station 1 and 9 is shut down until the storm passes."
Meanwhile, NGPL declared a force majeure impacting southbound flows on Segment 22 and through its Compressor Station 300.
"Over the past 14 days, TGP has delivered an average of 446.2 MMcf/d to NET Mexico and NGPL has delivered an average of 302.1 MMcf/d to NET Mexico -- a cumulative 38% of the volumes exported to Mexico on NET. Los Ramones I and the SISTRANGAS system in Tamaulipas both receive significant volumes from NET Mexico," Genscape said. "Rerouting options are limited as these are the only two interstate pipelines in the area connecting to NET Mexico. However, there are multiple other intrastate interconnects available, provided they are unaffected by the hurricane."
Genscape estimated Friday that Gulf of Mexico (GOM) production was down about 580 MMcf/d as a result of Harvey, dropping to 2.26 Bcf/d from a two-week average of 2.84 Bcf/d. The firm forecast 14 cooling degree days (CDD) through the weekend in East Texas, compared with a seasonal norm of 19 CDDs.
PointLogic estimated that about 1 Bcf of total dry gas production had been lost due to Harvey as of Friday. GOM production was down 433 MMcf day/day Friday, with Texas down 347 MMcf day/day; GOM production has dropped 645 MMcf the last few days due to the storm, PointLogic said.
"The Gulf of Mexico has lost 24% of gas production in the last three days, and Texas is down just over 2% in a single day," PointLogic said. "Gulf Coast NGL [natural gas liquids] production is down 50,000 b/d in the last three days as well to 328,000 b/d today to the storm and is expected to decline further when the storm makes landfall.
"Texas inland NGL production is also down day on day by an additional 28,000 b/d. With Harvey forecast to hit Friday and then stall, dropping dangerous levels of rain on the Texas coast, production levels could continue to drop and not return to normal until at least after the weekend."
Drilling and production activities across Texas were being curtailed in response to the storm with ConocoPhillips and Statoil ASA among the exploration and production companies that had suspended drilling activity not only in the offshore but also in the Eagle Ford Shale of South Texas.
Marathon Oil Corp. had released "nonessential personnel" from its Eagle Ford operations and was "in the process of suspending operations where appropriate," a spokesperson said. Pioneer Natural Resources Inc. also had stopped completing wells in the Eagle Ford. "The safety of our employees is paramount in these situations, therefore completion operations will pause until the storm has moved out of the area," a spokesman said.
Traders actually see opportunity in the market's failure to respond positively to Hurricane Harvey. "While the market's lack of bullish response to gas production disruptions within the GOM might be sending off some bearish overtures, we see at least double upside price possibilities from current levels compared to downside risk," said Jim Ritterbusch of Ritterbusch and Associates in a note to clients.
"The lost production is reinforcing our expected support at the $2.85 area despite the fact that the curtailed output is being largely offset by an expected reduction in cooling demand that was already being reduced by a major reduction in CDD accumulation during this late summer period. And despite the fact that [Thursday's] weekly EIA guidance was much in line with industry forecasts, the dynamic of surplus contraction was sustained.
"With the storage excess against five year averages now whittled down to only 45 Bcf, we feel that there is little margin for error for any additional supply loss due to storm activity into the GOM. With this in mind, we would look to approach the long side of the October contract on price pullbacks today into the $2.90-2.95 zone risking to below the $2.84 level in quest of a price upswing to the $3.14 area.”
In the physical market forecasts of declining energy usage set the stage for hefty declines in eastern energy markets. Monday usage was expected to be less than that of Friday. The PJM Interconnection forecast that peak power load Friday of 37,732 MW would decline to 32,801 MW Saturday, but only make it up to 36,079 MW by Monday. The New York ISO estimated that peak power load Friday of 20,101 MW would ease to 17,328 MW Saturday before climbing just under Friday's peak at 20,029 MW.
Gas at the Algonquin Citygate tumbled 42 cents to $1.68 and gas headed for New York City on Transco Zone 6 parachuted 72 cents to $1.39. Deliveries to Dominion South fell 27 cents to $1.41 and gas priced at Tetco M-3 Delivery was quoted down 33 cents to $1.38.
Price declines elsewhere were not as steep. Gas at the Chicago Citygate shed 5 cents to $2.82 and deliveries to the Henry Hub changed hands 3 cents lower at $2.93. Gas on El Paso Permian gave up 6 cents to $2.59 and packages priced at the NGPL Midcontinent Pool also lost 6 cents to $2.65.
Gas at Opal fell 4 cents to $2.68 and Kern Delivery was seen 4 cents higher at $2.94. Gas at Malin was quoted a nickel lower at $2.74, and gas priced at the SoCal Border Average rose 7 cents to $2.90.