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February Natural Gas Forward Prices Surge Amid Persistent Cold, Record Storage Draw

Unrelenting cold and a record-by-a-long-shot natural gas storage withdrawal sent February gas prices up an average 46 cents from Jan. 5 to 11, with New England markets surging more than $2.00 and Northeast markets up more than $1.00 as bitter conditions are expected to remain in the region for at least another week, according to NGI’s Forward Look.

While Nymex futures led the way, the benchmark’s gains paled in comparison to its northerly neighbors. The Nymex February futures contract rose 29 cents over the period and settled Thursday at $3.084.

Most days ended in the black for Nymex futures as weather guidance became more supportive throughout the week, while the hype of a record storage withdrawal that began building during the first week of January delivered and then some. While the widest estimates ranged from -285 Bcf to -362 Bcf, the record 359 Bcf draw reported by the Energy Information Administration (EIA) came in an astounding 25 Bcf above median estimates and 71 Bcf above the previous record achieved on Jan. 10, 2014.

The February contract had already run up above $3.00 ahead of the 10:30 a.m. EDT Thursday release of the final number. Once the -359 Bcf figure crossed trading desks, prices quickly bid up above $3.055 before briefly see-sawing back below $2.980 amid heavy producer selling.

The 359 Bcf withdrawal in the Jan. 11 report is more than double the year-ago and five-year average withdrawals of 151 Bcf and 162 Bcf, respectively. Inventories are now at 2,767 Bcf, 415 Bcf less than last year at this time and 382 Bcf below the five-year average of 3,149 Bcf.

Unsurprisingly, most of the Nymex weekly gain stemmed from the storage report as the prompt month jumped nearly 18 cents on Thursday alone. While most traders had their attention on the overall storage withdrawal number, Mobius Risk Group said another important detail was embedded in the data. Salt domes pulled 76 Bcf out of storage, which was a whopping 30 Bcf more than the prior maximum withdrawal in this asset class.

“These high-turn (flex storage) assets now hold 119 Bcf less in storage than they did at the same point last year, and more importantly, 20 Bcf less than the comparable week’s prior five-year minimum,” Mobius said.

Still, Thursday’s price action was heavily-weighted to the front month, as persistent producer selling kept the back end of the futures curve relatively steady, Mobius noted. Each calendar year moved less than a penny, with respective closing prices of $2.808, $2.819, $2.853.

“While there is some decent backwardation in the next three calendar months, which is normal, the overall shape of the curve is still best described as flat,” Mobius said. “Although a dip back towards a contango natural gas curve is not out of the question, underlying fundamentals suggest backwardation should become meaningfully pronounced again at some point this year.”

From a technical perspective, the February contract is already “way overbought”, as measured by slow stochastics, and is trading above the 20-day Bollinger band, according to NGI’s Patrick Rau, director of Strategy and Research. “I'd expect some short-term profit taking to step in here, especially after the nice 29-cent rise this week,” he said.

The combination of the much stronger-than-expected storage withdrawal (versus what was already expected to be a record-setting weekly withdrawal figure) and another spate of cold weather into early this week certainly gave buyers ammunition to push February higher, Rau said.

“But look how high it got. Once it came into contact with the downtrend line that started in May 2017, the rally stopped,” he said. For futures to rally and stay above the trendline, it's going to take a fundamental change in the supply-demand picture, he noted.

“Is this week enough to change that? I doubt it. Natural gas production should remain robust in 2018, especially with crude prices above $60/bbl. There are already a good amount of hedges in place, and $60 oil makes unhedged associated gas look all the better.”

Meanwhile, weather data continues to point to milder conditions by month’s end, which should reverse the recent rally, although models have yet to agree on just how exactly temperatures will play out.

For now, a strong cold blast with rain and snow was expected to sweep across the Midwest Friday with lows for several nights again spanning -15 F to 15 F, according to NatGasWeather. The cold front was expected in the East over the weekend, while a colder-trending series of weather systems was forecast to sweep across the eastern half of the country throughout the coming days. And while some freeze-offs are again expected, they likely are not to be as impressive as the ones witnessed earlier this month, the forecaster said.

Data and analytics company Genscape Inc. agreed weather conditions and its effects should not be as severe as in recent weeks. The Louisville, KY-based company was projecting demand to crest the 100 Bcf/d mark again beginning Sunday as Lower 48 population-weighted heating degree days were forecast to run about 28% colder than normal and remain near that level through Thursday.

Accordingly, Genscape expected demand to breach the 100 Bcf/d mark on Sunday and then soar as high as close to 107 Bcf/d on Wednesday and Thursday. There are risks to the downside, however, with the three-day weekend marked by the Martin Luther King Jr. holiday.

“While we expect many eastern basis market prices to rise as systems become subject to constraints, we do not expect the same magnitude of gains as we saw in the previous two weeks,” Genscape said. “Midwest basis prices are also expected to rise, but also not to the same magnitude as supplies are not expected to be as molested by freeze-offs or demand pulls from western and northern markets.”

Meanwhile, a warm ridge was on track to build over the southern and eastern United States from next Friday (Jan. 19) through Jan. 22, easing demand back to lighter levels, NatGasWeather said.

“There were mixed trends with a weather system moving out of the central U.S. and into the East around Jan. 24. The weather models are really struggling with the strength and track of this system, so expect changes over the weekend,” the forecaster said.

Indeed, midday data on Friday had this system trending less impressive with the strength of it, NatGasWeather said. The slight bullish turn in that system, coupled with the strong demand expected over the next few days, was enough to spook traders. Early Friday afternoon the Nymex February futures contract had jumped another 10-plus cents before ultimately settling at $3.200, up 11.6 cents on the day.

Northeast Markets Surge, While Operations Strained

Gas markets in the Northeast and New England once again posted the steepest increases for the Jan. 5-11 period, even as the region got somewhat of a break from the unrelenting cold.

After high temperatures in Boston failed to get out of the teens over the Jan. 6-7 weekend, highs were expected to climb to a balmy 60 by Friday (Jan. 12). The spring-like temperatures weren’t expected to last, however, as AccuWeather showed highs topping out in the mid-20s by Monday and staying in the 20s and 30s throughout the week.

For its part, Genscape showed New England demand for the short holiday work week averaging 3.64 Bcf/d, up from the 3.26 Bcf/d expected on Friday and the previous seven-day average of 3.58 Bcf/d. For the Jan. 22-26 period, the company is projecting demand to average 3.50 Bcf/d.

In New York, the warmest weather was forecast for Friday before temperatures plunge during the third week of January. Genscape showed overall demand in Appalachia playing out much like in New England, averaging 19.026 Bcf/d for the coming week and then 17.384 Bcf/d for the following week. For comparison, demand on Friday was expected to reach only 13.52 Bcf/d, while the Jan. 5-11 period saw demand average 16.83 Bcf/d.

Given the spike in expected demand in the coming week and the surge in spot gas prices for gas day Jan. 8, February forward prices put up the heftiest weekly gains of the winter so far. At Algonquin Gas Transmission City-gates (AGT CG), February forwards shot up $2.54 from Jan. 5-11 to reach $11.619, according to Forward Look. AGT CG cash prices for gas day Jan. 8 averaged above $24, according to NGI.

However, the stout increases along the forward curve didn’t end there. AGT CG March prices rose $1.31 during the same time frame to $6.868, while the February-March package rose $1.92 to $9.24. Even the winter 2018-2019 strip was up an impressive 40 cents to $7.35.

At Transco zone 6-New York, February forward prices jumped $1.87 from Jan. 5-11 to reach $8.474 (compared to prices for gas day Jan. 8, which averaged $49.82), while March picked up 37 cents to reach $4.087. The February-March package tacked on 87 cents to hit $4.77, Forward Look shows. The winter 2018-2019 strip was up 18 cents to $3.97.

The week’s impressive rally in forwards also came as several restrictions were put in place ahead of the coming cold snap. Columbia Gas Transmission issued Critical Day notices for Sunday to Tuesday and until further notice for several of its market areas. Dominion Transmission also ordered restrictions for parts of its service area beginning Saturday until further notice.

Meanwhile, Transco’s reported aggregate storage inventory was at its lowest levels since Genscape began collecting data in 2007. Timely cycles for Jan. 10 reported an aggregate inventory level of 59.0 Bcf, 67.7% of its total working capacity of 87.11 Bcf. Prior to 2018, aggregate inventories between 2008 and 2017 averaged 70.85 Bcf at this point in the year, Genscape said.

2015 was the previous low record holder, reporting inventory of 59.75 Bcf at this point of withdrawal season, although winter 2013-2014’s withdrawal season proved to be the heaviest overall, with inventories falling to 22.62 Bcf, 26.0% of its working capacity, Genscape said.

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