July natural gas prices were decidedly lower Monday morning, trading 3 cents lower at $2.915 ahead of the market open despite increasing heat in the near term.
Although weather models didn’t change much from Friday, confidence in heat peaking in the short term increased, as several models agreed that heat would peak later this week across much of the Northeast and from there, ridging gradually propagates back to the West, Bespoke Weather Services said.
Although forecasts still call for impressive heat through the first week of July, that heat will likely be focused outside of the South, where the strongest impact on physical prices would be seen, and instead the core of heat shifts from the Northeast into the Midwest.
“This should increase cool risks moving into week 3 as well as we begin to see a more Nino-like pattern dominate,” Bespoke chief meteorologist Jacob Meisel said.
Although gas-weighted degree days (GWDD) will be “very above average the next two weeks,” Bespoke is skeptical that weather forecasts will add many more through the coming week.
EBW Analytics agreed, noting that support for a pattern shift in mid-July is increasing, which would moderate temperatures. “This signal is pushing prices down this morning and could open the door to significant further declines.”
In addition to the shift in weather models for mid-July, maintenance season appears to be winding down, and weekend production increases appear enough to cancel out the impact of hot forecasts lingering from Friday.
Indeed, Genscape Inc. reported on Monday that production is setting record highs even as prolonged shoulder-season maintenance events start to wrap up, with the company estimating that Sunday’s production set a new high at 79.96 Bcf/d. Monday’s volumes are down 0.3 Bcf/d day/day, but remain more than 1 Bcf/d higher than last week’s volumes.
Volumes for the past two days compared to last week’s averages have showed the largest gains in the Permian Basin (up 0.37 Bcf/d), non-Permian Texas (up 0.33 Bcf/d), Rockies (up 0.29 Bcf/d) and Gulf Coast (up 0.28 Bcf/d).
This brings daily Lower 48 volumes almost exactly in line with Gensape’s production forecast for July, “which had been above actuals for a period due to the extension of normal shoulder-season maintenance into the summer,” Genscape senior natural gas analyst Rick Margolin said.
On the demand side, another round of hotter-than-normal weather was expected to lift power burns into the weekly average range around 36 Bcf/d, about 5 Bcf/d higher than last week’s average burns. Lower 48 population GWDDs are forecast to come in about 25% hotter than normal for this time of year, with the greatest departures forecast for New England and Midwest/Midwest Independent System Operator markets, Genscape said.
As for Monday’s price action, Bespoke said without many significant GWDD additions from Friday, forecasts are “still supportive but not necessarily a strong bullish catalyst” and loosening daily balances with production back at record highs appear enough to overwhelm bullish weather and force the whole strip lower.
That said, any hotter weather model runs could see the front of the strip catch a bid, especially with cash prices remaining strong and the July contract set to expire on Wednesday.
“Accordingly, we would not be surprised to see prices occasionally be able to rally on GWDD adds, especially if production pulls back at all. However, with production this high and weather set to cool into week 3, any weather-driven bounces remain strong shorting opportunities into early July,” Meisel said.
Crude oil futures were trading Monday morning 54 cents higher at $69.12, while RBOB Gasoline futures were trading 2.2 cents lower at $2.0476.