Bears tightened their grip on the natural gas futures market Tuesday, sending prices lower as production continues to overshadow summer heat and storage deficits. Spot prices backed off Monday’s gains, including sharp declines in California and the Northeast coinciding with forecasts for less intense heat; the NGI National Spot Gas Average dropped 8 cents to $2.66/MMBtu.
The August Nymex futures contract followed up declines last week and Monday by giving up another 4.0 cents to settle at $2.788 Tuesday, near the intraday low of $2.784. A rally to as high as $2.835 prior to the open failed to last as prices steadily worked lower throughout the session. September settled 3.8 cents lower at $2.758.
Tuesday’s sell-off plunges the prompt month down into a band of support at $2.809-2.795-2.792-2.775-2.774 highlighted this week by ICAP Technical Analysis.
With the prompt month challenging support “and no signs of bottoming action anywhere the bears have an opportunity to keep the pressure on,” ICAP analyst Brian LaRose said following Tuesday’s session. “Next step down in this case would be $2.752-2.730. After that, there is room down to $2.701-2.672, then $2.610-2.600 next.”
Analysts continue to point to the seemingly unstoppable growth of supply as a primary force applying downward pressure to futures.
RBN Energy LLC analyst Sheetal Nasta on Tuesday highlighted a rapid 1.5 Bcf/d surge in Lower 48 natural gas production over the final three weeks of June to help explain why prices have been heading lower as of late despite a large storage deficit to year-ago and five-year average levels that has continued well into the refill season.
“It’s no surprise that Lower 48 production has been on a tear lately” given capacity expansions in the Northeast and high rig counts, Nasta said. “What has taken the market by surprise, however, is the abruptness and sheer strength with which production has surged in just the past couple of weeks.”
RBN’s data shows production starting the year at 76.3 Bcf/d, down from December 2017. Production climbed in February and March to near 79 Bcf/d before growth stalled, according to Nasta, with output hovering around 79 Bcf/d between March and June.
“It wasn’t until the second half of June that output shifted into high gear,” she said. “If we compare average volumes in the week ended June 7, versus the week ended June 28, we see that total Lower 48 dry gas production zoomed higher by about 1.5 Bcf/d in that time to 81.8 Bcf/d by June 30, with the bulk of those gains occurring in the last week of the month.
“The production gains have continued into July,” with recent data showing volumes hitting a new high at 82.2 Bcf/d over the weekend. “That’s a whopping 10 Bcf/d higher than this time last year. It’s no wonder that Henry Hub futures, which touched the $3/MMBtu mark in late June, have whimpered back 15 cents or so since then...”
Nasta said a number of regions posted output gains from early to late June to drive this period of rapid growth, including the usual players in the Northeast and Texas, along with output growth from the Rockies, the Haynesville Shale and offshore Gulf of Mexico.
“The bottom line is that a variety of factors converged in late June to propel production to new heights,” Nasta said. “With peak summer demand likely still ahead and more takeaway capacity due online, production growth for this year is far from over. Recent filings suggest” Rover Pipeline LLC “is champing at the bit to get the last of its 3.25 Bcf/d capacity online, with about 1.0 Bcf/d still left to go, not to mention Transco’s Atlantic Sunrise project (due online later this year), and the possibility of Leach XPress capacity returning by mid-July, among others.”
Even as Lower 48 natural gas production has reached record highs in recent days, strong power demand in the South Central region of the United States stands to challenge storage injections going into the peak summer period, according to Barclays Commodities Research.
The Energy Information Administration (EIA) reported inventories at 2,152 Bcf as of June 29, putting stocks at a year-on-year deficit of minus 717 Bcf and a year-on-five-year deficit of minus 493 Bcf.
By region, Midwest storage stocks trail historic levels most significantly, with 2018 inventories about 35% below year-ago levels and about 26% below the five-year average. Stocks in the Mountain region are currently about 26% below year-ago levels and 15% below the five-year average. The South Central region is at a similar deficit, with stocks about 26% below year-ago levels and 16% below the five-year average.
The persistent storage deficits have come as power demand is off to a strong start this summer, Barclays said. During the recent heat wave that started at the end of June and continued through the Fourth of July holiday, daily gas burns reached nearly 40 Bcf/d.
Even without the help of Mother Nature, power demand has been “robust” on a weather-adjusted basis and is forecast to grow 2.2 Bcf/d this year, Barclays researchers said. With more than 40% of the year/year storage deficit in the South Central region, where demand growth is concentrated, “storage refills there should help put a bid under Henry Hub cash prices through October.”
Looking at the weather, overnight changes heading into Tuesday’s session showed cooler trends late next week and next weekend, and those trends continued in the midday data, dropping a few additional cooling degree days (CDD), according to NatGasWeather.
“The latest data teases a stronger ridge building into the eastern U.S. the last week of July, but with much more to prove,” the firm said. “It’s still a hot overall U.S. pattern elsewhere with upper high pressure dominating large stretches of the country, just not hot enough across the important Great Lakes and Northeast, especially late this week and again” around July 18-23.
Meanwhile, Tropical Storm Chris was expected to officially strengthen into Hurricane Chris Tuesday “when it moves over warmer waters, and some additional strengthening is expected through Wednesday night,” according to the National Hurricane Center (NHC). “Chris is forecast to become a strong post-tropical cyclone by Thursday night or early Friday.”
The storm was located about 200 miles southeast of Cape Hatteras, NC, Tuesday, the NHC said.
Turning to the spot market, prices moderated Tuesday across a number of the same regions that had posted strong gains during trading Monday.
AccuWeather was calling for highs in Burbank, CA, to remain in the low 90s the rest of the week after temperatures there climbed as high as 114 degrees on Friday.
Southern California Gas was projecting system demand to ease slightly from 2,554,000 Dth/d on Tuesday to around 2,300,000-2,400,000 Dth/d later this week. Receipts were expected to total just over 2,500,000 Dth/d the next several days, according to the utility.
System-wide demand for SoCalGas “spiked to 2.75 Bcf/d on Friday, its highest level since mid-March,” according to Genscape Inc. analyst Joe Bernardi. “Since Friday it has remained elevated, averaging 2.497 Bcf/d in that time -- nearly 450 MMcf/d above the previous average baseline of 2.053 Bcf/d.”
Import capacity into the SoCalGas system “is still severely constrained due to ongoing outages on L235 and L3000. Although the working capacity at Aliso Canyon has been increased by nearly 10 Bcf, it is still only to be used after other mitigation measures have been employed, and SoCalGas has not posted any notice of having made withdrawals from Aliso over the past several days.”
In the Northeast, a number of points dropped by double digits as forecasts showed heat along the populated Interstate 95 corridor easing over the next few days. AccuWeather was calling for highs in the 90s in Boston Tuesday to give way to highs in the upper 70s Wednesday and Thursday. New York was expected to see highs drop from the 90s down into the mid-80s.
Algonquin Gas Transmission (AGT) has notified customers that it plans to “conduct an immediate investigation” from the Hanover (New Jersey) to Stony Point (New York) compressor stations on its mainline Wednesday, according to Genscape analyst Josh Garcia.
“As a result, receipts from the Mahwah interconnect with” Tennessee Gas Pipeline (TGP) “in Bergen County, NJ, will be limited to 537 MMcf/d for that gas day only. This location is part of the Tetco/AGT lease, and receipts from TGP have averaged 827 MMcf/d and maxed at 881 MMcf/d,” Garcia said. “AGT has options to source from other interconnects in the area, such as the Ramapo interconnect with Millennium. Ramapo has around 200 MMcf/d of unused capacity, and we have seen this location compensate for lost receipts from Mahwah in the past.”
Starting Wednesday and continuing through Saturday, Texas Eastern plans to conduct “further detailed investigations” on its 30-inch Line 10 between compressor stations in Owingsville, KY, and Wheelersburg, OH, potentially impacting around 200 MMcf/d of supply, according to Garcia.
“Scheduled capacity through the 30-inch line from Berne 30-inch South to Barton South will be reduced by as much as 200 MMcf/d compared to the previous 30-day max, although flows have been trending downwards over the last few days,” Garcia said. “Further down the line, capacity through the St. Francisville and Union Church compressors was cut by 166 MMcf/d due to concurrent maintenance beginning” Monday.
The two events could constrain supply lines and widen the spread between M2 and eastern Louisiana, according to Garcia, who said forecasts over the next week show around 15.5 CDDs in the Southeast, just above 30-year norms.