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Natural Gas Futures Rally Sharply on Hotter Medium-Term Weather Trends

  • June settles at $2.908, up 9.8 cents d/d
  • Overnight forecasts trended hotter, were “likely to ignite the natural gas market,” says Bespoke
  • “Can’t really get too bearish until there’s some confidence” in refilling storage to “healthy amount” by November, says INTL FCStone’s Saal
  • U.S. natural gas market no longer self-correcting with supply surges from associated gas: Bernstein

In contrast to recent range-bound action, natural gas futures added close to a dime Tuesday as forecasters noted hotter medium-range weather trends that could keep current storage deficits from shrinking as quickly as previously thought. In the spot market, prices strengthened across the Midwest and Texas with hot weather on the way, while points in the West pulled back; the NGI National Spot Gas Average added 4 cents to $2.44/MMBtu.

The June futures contract settled at $2.908 Tuesday, up 9.8 cents on the day. July settled 8.6 cents higher at $2.936.

Bespoke Weather Services said that going into Tuesday’s session the overnight forecast trends, which showed an increase in projected cooling demand through early June, “appeared likely to ignite the natural gas market. Ignite they did, too, with prices pressing through the $2.87 resistance level this morning and finally stopping in our next $2.90-2.92 resistance range.

“Confidence is back a bit lower now, as we do see further short-term upside should current forecasts be able to hold but worry that relatively loose weather-adjusted power burns and long-range cooler risks could quickly reverse prices,” the firm said.

INTL FCStone Financial Inc. senior analyst Tom Saal said the rally came as a bit of a surprise in terms of the timing. The more supportive forecast trends likely prompted some short-covering, he told NGI.

“I’m kind of bullish overall, because I think we’re starting off the summer so low in inventory,” Saal said. “You can’t really get too bearish until there’s some confidence that we’re going to have a healthy amount in storage by November, and that’s going to take a while.”

Saal said the market has been “oscillating” for months and “has really compressed itself down to where it could explode out.” However, he was unsure if Wednesday “will be that day,” given the potential for prices to pull back following Tuesday’s rally.

Tuesday’s gains are set against a backdrop of bearish long-term predictions for natural gas based on expectations for supply growth -- mainly from Northeast producers filling new pipeline capacity and associated gas out of oil-focused plays -- to outpace demand over the next few years.

According to a recent analysis by Sanford C. Bernstein & Co. LLC, U.S. natural gas markets are no longer self-correcting as supply surges from onshore unconventional oil-associated wells, particularly the Permian Basin, while demand is maxing out even with exports.

Gas price moves are sluggish, and “long periods of low gas prices” are likely if oil prices are constructive to U.S. growth, said Bernstein analyst Jean Ann Salisbury and her colleagues. “We are gas bears and believe that we have seen the end of $3.00/MMBtu gas prices for at least seven years.”

The Bernstein forecast is based on: expectations for demand growth to flatten after 2020, even after accounting for exports of liquefied natural gas (LNG) and exports via pipeline to Mexico; expectations for associated gas to make up an increasingly larger share of supply; and the potential for the “sunk cost curse” to lead Appalachian producers to drill at uneconomic price levels to fulfill midstream take-or-pay contracts as new pipeline capacity comes online.

A recent analysis from global consulting firm Energy Aspects touched on similar themes.

“The North American natural gas market has been subject to one overriding concern for most of the past year -- the expectation of supply growth,” the firm said, also pointing to associated gas and new Appalachian pipeline capacity as key drivers. “...But in the face of such oversupply, demand has been driven by near-record late-season cold in April to well above normal heat in May, helping to trim storage injections and put at least a mild premium back into Winter 2018/19” versus the summer months for 2018 and 2019.

Energy Aspects is forecasting 7.8 Bcf/d of year/year growth in domestic production through October, with more than 3 Bcf/d forecast for the 2019 injection season. This growth is “led by further gains in Appalachian output as the Rover, Nexus and Atlantic Sunrise pipelines are all set to be fully in service before next year, encouraging producers to increase their prompt-year hedge ratios above those seen a year ago.

EQT Corp., Southwestern Energy Co., Antero Resources Corp. and Chesapeake Energy Corp. “have all either increased their forward sales as a share of their projected output” for Calendar 2019 “or were already fully hedged as of the end of 1Q2018, compared to the end of 1Q2017, further weighing on a declining Calendar 2019 price curve.”

The prospect of production growth makes it “hard to consider the market undersupplied” in terms of the 2018 injection season, “especially following the first triple-digit build of the year,” Energy Aspects said. “Yet the near-term injection outlook reflects the impact of warmer-than-normal weather and rising LNG feedgas demand, keeping our end-of-season view relatively unchanged at just above 3.4 Tcf.”

Turning to the spot market, prices strengthened throughout most of East Texas as forecaster Radiant Solutions was calling for temperatures in Dallas and Houston to climb into the 90s over the next several days, near to slightly above normal for this time of year.

Katy added 4 cents to $2.94, while Tolar Hub climbed 5 cents to $2.82. The outlier was Texas Eastern E. TX, which fell 5 cents to $2.69.

Texas Eastern (Tetco) is expected to conduct an outage starting Wednesday and continuing through Saturday between the Lufkin and Joaquin compressor stations (CS) in its East Texas tariff zone, according to Genscape Inc. analyst Josh Garcia.

“Southwest flows through the Lufkin CS will be reduced to 0 MMcf/d for the duration of the outage after averaging 184 MMcf/d and maxing at 225 MMcf/d over the last 30 days,” Garcia said. “Between the Lufkin CS and the null point on this line near the Provident City CS, there has been up to 109 MMcf/d of delivery imbalance over the same time period, with the most notable demand point being Entergy’s 504 MW Lewis Creek power plant.

“However, the Lewis Creek plant also gets supply from the Kinder Morgan Tejas, Kinder Morgan Texas and Copano Energy Services intrastate pipelines, and it is possible that Tetco will reverse flows into this segment from the rest of South and East Texas.”

Cities in the Midwest should see above-normal temperatures over the next few days, especially toward the end of the week, according to Radiant. The firm was calling for Minneapolis to see temperatures around 16-17 degrees warmer-than-normal by Thursday and Friday, with highs in the upper 80s. St. Louis was expected to see highs reach the upper 80s to low 90s by the end of the week, with Chicago expected to see highs in the mid-80s -- around 10-15 degrees above normal.

Chicago Citygate gained 14 cents to $2.68, while Emerson jumped 20 cents to $2.50.

“Numerous weather systems will bring areas of heavy showers across the U.S. the next few days, focused over the West, Ohio Valley and Southeast, although with only minor cooling,” NatGasWeather.com said in its one- to seven-day outlook Tuesday. “The northern U.S. will be mild to warm with highs of upper 60s to 80s, while the southern U.S. will be very warm with 80s and 90s, hottest over the South and Southwest.

“The weekend into early next week will be warmer than normal across most of the country, but still with areas of showers, especially over the interior West and Southeast. Overall, demand will be near normal.”

In Appalachia, price moves were mixed as Genscape was forecasting moderate demand for the region over the next several days. Dominion South shed 2 cents to $2.18, while Columbia Gas added 4 cents to $2.68.

A “glut” of new combined-cycle (CC) gas-fired generating capacity will offset 3,743 MW of baseload generation expected to retire this summer in the PJM Interconnection footprint, Genscape’s Garcia said.

“According to Genscape’s PJM desk, the majority of outgoing generators are coal plants that had summer 2017 capacity factors of less than 11.2%, with the exception of the 600 MW Killen 2 Plant (87.3% Summer 2017 capacity factor) and the 1,737 MW Stuart 2-4 (57.2% Summer 2017 capacity factor),” Garcia said.

“The 163 MW Bayonne Cogen CC gas plant is also set to retire in June. However, new gas generation will replace these outgoing coal plants, with most of the new plants already in partial service. These new plants include the 1,050 MW Moxie Freedom Generation Plant in Luzerne Co., PA; the 703 MW St. Joseph Energy Center in St. Joseph County, IN; and the 1,124 MW Hummel Station in Snyder County, PA.”

Spot prices in the West saw broad declines Tuesday, including a 19-cent drop at SoCal Citygate, which averaged $2.51 on the day. SoCal Border Average shed 3 cents to $1.94.

Regulatory restrictions on California’s Aliso Canyon storage facility following the 2015 leak could cause problems for utility Southern California Gas (SoCalGas) this summer, according to Energy GPS.

“The current SoCalGas system is under maintenance. Some of this is forced and some of this is planned, which is taking the available pipeline supply from the Rockies and West Texas down from 3.1 Bcf/d last summer to 2.58 Bcf/d this summer,” the firm said. “That is a 17% cut in system deliverability at a time when peak gas demand is expected to reach 3.5 Bcf/d. If the withdrawals from all other storage facilities on the system are maximized, Aliso will still need to take gas out of the ground for reliability.”

The California Public Utilities Commission (CPUC) recently approved a request from SoCalGas to allow injections into Aliso for summer reliability, but the details had not been published as of Tuesday, according to Energy GPS.

“The problem with directing SoCalGas to refill Aliso Canyon is that gas has the potential to be diverted from other storage caverns on the system for the purpose of meeting the CPUC order,” the firm said. “That means those molecules will then be put on the Aliso Canyon Use Protocol, which would call for rationing of power generation and every other means of meeting demand before the volume can be taken out of the ground.

“The protocols are specifically designed to limit the use of the facility, which means that the volume that gets injected is less likely to be used.”

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