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Natural Gas Futures Set Eight-Month High on Tight Storage Outlook; Cash Eases After Spikes

Natural gas futures rallied to an eight-month high Wednesday ahead of Energy Information Administration (EIA) storage data that was expected to show another large pull to follow last week’s record. After a winter storm dropped snow and ice across the South, spot prices retreated Wednesday from weather-driven premiums set the day before; the NGI National Spot Gas Average fell $1.07 to $4.36/MMBtu.

The February contract gained 10.3 cents Wednesday to settle at $3.232. Wednesday's intraday high of $3.288 is the highest a front-month contract has traded since May 23, 2017 when the June 2017 futures contract reached $3.333.

The March contract settled 6.2 cents higher on Wednesday at $3.024.

Powerhouse's David Thompson, vice president, said Wednesday's settle price marked a significant technical breakout, besting recent highs established earlier in the winter in the $3.230 area.

"So we broke out of this little triple top," possibly leading to "some buying on that technical breakout," he said. "Getting through that previous high at $3.231 does open the door to possibly test the next recent relevant highs of $3.33 and $3.43, with $3.43 being the most important."

However, "we're running out of days of winter," Thompson said. "We'd likely have to have a change in weather pattern showing up that looks like it's going to dominate through February to give us a shot to break above $3.43 at this time."

Weather models Wednesday showed generally milder conditions through rest of January, leaving the market to focus on what's in store for early February.

NatGasWeather.com observed "subtle changes" in the midday data Wednesday "mainly due to the weather models struggling to resolve the timing and strength of weather systems late next week and beyond. A weather system tracking out of the central U.S. and into the East Jan. 23-24 has trended a little colder this round, while weather systems around Jan. 26-28 are all over the place as far as track and strength, but seen as milder this round.

"Most of the data still favors a mild ridge returning over the East Jan. 29-31 for lighter demand," the firm said. "To our view, the early February pattern is quite important, and we expect cold to return across the northern and eastern U.S., which the markets will be watching very closely for signs of."

In a note to clients Wednesday, Bespoke Weather Services said, "The 13-15 day forecast continues to look quite bearish across all guidance now, with a sizable eastern ridge, and even before then any cold shots look to be brief as heating demand struggles to get back above average for any sizable amount of time.

"Yet natural gas prices shook all these weather trends off today and continued advancing...a sign that the market may be more focused purely on storage concerns and associated risk premiums ahead of the EIA print Thursday," Bespoke said.

A Reuters survey of traders and analysts showed the market on average expecting EIA to report a 199 Bcf withdrawal for the week ending Jan. 12, versus a year-ago withdrawal of 230 Bcf and a five-year average pull of 203 Bcf. Responses ranged from -180 Bcf to -215 Bcf.

Stephen Smith Energy Associates in its Weekly Gas Outlook predicted a withdrawal of 196 Bcf, versus a seasonally normal weekly withdrawal of 187 Bcf based on 2006-2010 norms.

PointLogic Energy predicted a 197 Bcf withdrawal. "Total demand fell just over 27 Bcf/d week-on-week as the prior week's cold front dissipated," the firm said in a note to clients Tuesday. "The decline in demand was spread across the entire country, with the largest decline coming from the East and Midwest regions."

Kyle Cooper of ION Energy predicted a withdrawal of 193 Bcf.

EIA reported a record-shattering 359 Bcf withdrawal from U.S. gas stocks for the week ending Jan. 5. That withdrawal reported last week left inventories at 2,767 Bcf, 415 Bcf below prior-year levels and 382 Bcf below the five-year average, according to EIA data.

Meanwhile, unusually cold temperatures and wintry precipitation gripped the southern United States Tuesday and Wednesday, bringing ice and snow to Deep South states like Texas, causing power outages and disrupting travel in the process.

Texas grid operator ERCOT reported new demand records, while pipeline operators reported a flurry of outages and constraints. "ERCOT set multiple new winter peak demand records" Tuesday night and Wednesday, the grid operator said. As of Wednesday morning the new record stood at 65,731 MW.

"This is significantly higher than the record set during the cold snap earlier this month, which was 62,855 MW," ERCOT said. "During this week's winter weather event, ERCOT had sufficient generation and transmission resources available to keep up with demand."

Genscape Inc. said gas supplies are bearing more of the power demand load in ERCOT now because of more than 3 GW of recently retired coal-fired capacity.

"At the same time, numerous interstate pipelines and storage facilities serving ERCOT are under constraints." El Paso Natural Gas, Gulf South, Kinder Morgan Texas, Tennessee Gas Pipeline, Texas East Transmission Co. (Tetco) and Tiger "have all issued notices warning of limited operational flexibility and, in some cases, have issued operational flow orders (OFO)," according to Genscape.

Southeast Supply Header (SESH) declared a force majeure late Tuesday from an unplanned mainline outage between its Dentville and Gwinville compressor stations, reducing capacity through the Gwinville station to 350,000 Dth/d. Genscape said the outage effectively cut around 720 MMcf/d of deliveries through the system during the event. On Wednesday morning SESH told shippers that it had lifted the force majeure, returning to full service through the affected area.

Elsewhere, Genscape noted a force majeure declared Tuesday on Tetco's system impacting around 200 MMcf/d of southbound flows through its Blessing Compressor Station in Matagorda County, TX.

"Major delivery points downstream of this compressor include the Magic Valley power plant, two interconnects with the Onyx Intrastate Pipeline that feed the Nueces Bay 7 and Barney Davis power plants, and Tetco's export point to Sistrangas, Pemex-Reynosa," the firm said.

Also on Tuesday, Tres Palacios Storage declared a force majeure from a power outage, cutting around 400 MMcf/d (50%) of its withdrawal capacity, although scheduled withdrawals appeared to be restored as of the Wednesday’s evening cycle, according to Genscape.

Meanwhile, Sabine Pipe Line LLC told shippers Wednesday it could no longer accept nominations at its Acadian/Henry Hub interconnect point "in order to alleviate weather-related conditions which have threatened...system integrity."

Henry Hub fell $1.22 to average $3.87 Wednesday.

Day-ahead prices in Texas pulled back but remained elevated after the winter weather and pipeline constraints helped drive up cash prices Tuesday.

In East Texas, gas traded as high as $8.45 at Katy, which dropped 75 cents on the day to average $7.58 after prices were as high as $9.25 Tuesday.

Meanwhile, the Mid-Atlantic and Northeast also saw snowfall Wednesday, with some areas expected to see four to eight inches of accumulation, according to AccuWeather, which was calling for overnight lows in the 20s and highs in the mid-30s Thursday in Boston and New York.

At Algonquin Citygate, which has been managing capacity constraints throughout the winter, prices climbed 5 cents to $13.80, while further south Transco Zone 6 New York dropped $4.22 to $9.26.

In the Southeast, Transco Zone 5 dropped $4.37 to $8.99, while Tennessee Zone 1 100L fell $1.16 to $3.49.

This week's Arctic blast should give way to milder conditions by the weekend, according to NatGasWeather.

"With overnight lows dropping from 15 degrees to -15 degrees across the northern U.S. through Friday and teens to 30s across the South and Southeast, national heating demand will remain very strong," the firm said. "Demand will ease to much lighter levels this weekend as a mild ridge sets up over the eastern half of the country as Pacific systems with cooling arrive into the West."

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