• August drops 4.5 cents to $2.752; September down 4.2 cents to $2.724
  • Strip shows market “more concerned about production levels sitting right at record highs” versus tighter power burns: Bespoke
  • Higher demand y/y during injection season has kept pace with production, but balance loosening, says RBN’s Nasta
  • Pacific Northwest “will be especially hot” in the week ahead: Genscape

Natural gas futures bulls gave up more ground Friday as production continued to allay the market’s storage concerns. Spot prices fell throughout the Midwest with cooler temperatures in the forecast, while the volatile SoCal Citygate gained heading into the weekend; the NGI National Spot Gas Average dropped 3 cents to $2.68/MMBtu.

The August Nymex futures contract fell for the second straight session Friday, slipping 4.5 cents to settle near the intraday low at $2.752. August traded as high as $2.812 prior to the open before steadily working lower as the day progressed. The September contract settled at $2.724, down 4.2 cents, while January fell just below the psychologically significant $3 mark, settling 3.7 cents lower at $2.999.

Bespoke Weather Services said the drop to support around $2.75-2.77 Friday came as expected.

The strip Friday “again did not add much support until prices moved below $2.77,” with October/January “finally widening later in the day and providing some support up against $2.75,” Bespoke said. “Still, the strip indicates a market that is more concerned about production levels sitting right at record highs as opposed to power burns that only continue to tighten further on a weather-adjusted basis. Eventually, we see this market as having to take note of power burns unless weather entirely collapses, and this is keeping us from having a bearish sentiment into the weekend.”

The firm said it’s looking for slight losses in gas-weighted degree days for the end of July, “as tropical forcing indicates cooler risks should win out across areas that saw the strongest heat in June. This should stunt any natural gas rallies next week.”

The Energy Information Administration reported a net 51 Bcf injection into Lower 48 gas stocks for the week ended July 6, lower than the 59 Bcf injected last year and well shy of the five-year average 77 Bcf build.

“The industry, the market, the buyers and sellers, they’re not that concerned about being a little short on gas going into the winter” due to substantially higher production year/year, INTL FCStone Financial Inc. Senior Vice President Tom Saal told NGI. “Now winter’s kind of far away right now...maybe you get closer to winter and there may be more of a concern, but right now that’s the situation.”

Analysts with Tudor, Pickering, Holt & Co. (TPH) said the numbers suggest it will be a difficult climb for the market to reach normal inventories in the roughly 18 weeks left in injection season, requiring about 4.0 Bcf/d of slack.

“However, the 8-14 day outlook indicates ‘normal’ temperatures in the Midwest” and the expected weekend return to service of Columbia Gas Pipeline’s Leach XPress indicates “a Northeast production ramp is imminent,” the TPH team said.

Genscape Inc. analysts Vanessa Witte and Nicole McMurrer on Friday said the region lost about 120 MMcf/d of production because of an explosion last month that forced part of the Leach XPress line to be shut in.

Immediately after the explosion, “impacts were uncertain, but due to the recent in-service of the pipeline path, almost all production was able to be routed onto other pipelines,” Witte and McMurrer said. Further output from Leach XPress would add to what has been a “meteoric rise” in Lower 48 dry gas production this year.

At least, that’s how RBN Energy LLC analyst Sheetal Nasta described the 3 Bcf/d surge since April that has seen production reach nearly 82 Bcf/d month-to-date. That’s roughly 9 Bcf/d (12%) higher year/year (y/y), Nasta said.

Still, “record demand volumes thus far have managed to keep storage injections in check,” Nasta said, describing a situation where “the record production level is clearly dampening the gas futures price action but appears to be having little effect on shrinking the deficit, at least so far.”

There are a couple factors at play, according to Nasta. For one, a solid chunk of production gains showed up over the last couple weeks “and then they happened all at once, just as seasonal air conditioning demand was also picking up.

“That leads us to the other major factor -- that demand has been exceptionally strong as well...In terms of U.S. consumption,” including power generation, residential/commercial and industrial, “daily volumes have averaged nearly 70 Bcf/d this injection season to date, which is about 7 Bcf/d higher than the same period last year and the highest on record for this time of year,” Nasta said.

“The incremental demand has been in part due to weather, but also due to structural changes to the power generation fleet, including new gas plant additions and the retirement of a substantial volume of coal plant capacity.”

Injection season demand got off to a strong start thanks to an exceptionally cold April, then May proved unusually warm. June and July have delivered higher cooling demand y/y, while industrial demand has also come in about 2 Bcf/d higher y/y, according to Nasta. And that’s just domestic demand. Add in exports, and in total the market’s seeing about 8.8 Bcf/d of demand growth y/y, versus an incremental 8.7 Bcf/d of supply.

Still, with the recent surge in production “we have seen the balance loosen up drastically compared to last year -- even in the face of record power generation,” Nasta said. “In the first 12 days of July, the balance has shifted to a plus 1.8 Bcf/d versus the same period in 2017, and if we home in on just the week ended July 12, our storage model indicates that the moderating weather has shifted the balance to being 4 Bcf/d more bearish than last year, even with the declines in production in recent days.”

The market may be less sensitive to the storage deficit given elevated supply numbers, but “the lingering deficit still does raise the risk for a bullish winter, as it still leaves open the potential for deliverability issues day-to-day during peak heating demand periods.”

Turning to the spot market, prices sold off across the Midwest Friday as temperatures were expected to moderate to near or below normal levels in the region during the upcoming week.

“Hot high pressure will dominate most of the country into early next week with highs of upper 80s to 100s, hottest from California to Texas for strong demand,” NatGasWeather said. “Weather systems with showers and cooling will sweep across the northern and east-central U.S. during the middle and end” of the week ahead, bringing “highs of 70s to lower 80s for lighter demand, while the rest of the country remains hot with highs of 90s and 100s, including into the Northwest.”

Radiant Solutions was predicting highs in Chicago over the weekend in the upper 80s, slightly dipping into the mid 80s by Monday, and then falling into the upper 70s by Wednesday. The firm was calling for Minneapolis to see temperatures drop into the upper 70s by Tuesday.

Chicago Citygate shed 11 cents to average $2.63, while Joliet gave up 8 cents to $2.64.

The Northeast and West Coast should expect more heat in the week ahead, according to Genscape Inc. analyst Josh Garcia.

“The Pacific Northwest will be especially hot,” as temperatures were slated to get as high as 10 cooling degree days (CDD) above the normal on Sunday, Garcia said. “The Northeast and New England will also get a slight raise in temps, with CDDs in New England currently slated to be almost twice as much as normal. Genscape meteorologists currently forecast that heat to sustain for the next two weeks. However, an eastward moving cold front in the Midwest presents downside risk to this forecast.”

In New England, Algonquin Citygate saw a bump Friday, adding 18 cents to $2.85. Ditto for Tennessee Zone 6 200L, which added 15 cents to $2.81.

In the West, prices didn’t respond much to the forecast heat Friday, though the supply-constrained SoCal Citygate added another 21 cents to average $5.12. In Northern California, Malin added 2 cents to $2.58, while to the south SoCal Border Average shed 16 cents to $3.46. In the Rockies, Cheyenne Hub dropped a penny to $2.50, while Stanfield gave up 4 cents to $2.42.