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Natural Gas Futures Gain on Warmer-Trending August, Storage Deficits

Natural gas futures climbed Tuesday as storage concerns and warmer forecast trends for August helped prices bounce off support. In the spot market, one day after posting its highest average in at least a decade on a combination of sweltering temperatures and infrastructure constraints, SoCal Citygate pulled back to post a slightly less astronomical premium; the NGI National Spot Gas Average fell 29 cents to $2.93.

The August Nymex futures contract settled at $2.732 Tuesday, up 1.1 cents after trading as high as $2.743 and as low as $2.710. Gains were higher further along the strip. September, which has surpassed the front month in open interest ahead of Friday’s expiration, added 2.4 cents to settle at $2.719.

Bespoke Weather Services said the “more supportive strip” Tuesday suggested the market was starting to respond to storage concerns following last week’s bullish Energy Information Administration (EIA) inventory report and expectations for another lean build in this week’s report.

“Production seeming to tick lower certainly helped that too, as this market seems almost entirely production-focused at this juncture,” Bespoke said. “Afternoon model guidance similarly confirmed many of the longer-term warmer risks we are seeing later in the first week of August that are expected to carry over into the second week, even though we still see the end of July and first couple days of August holding around to below average cooling demand.

“Much of this is likely priced into the market already, though, and the return of at least some heat with stockpiles far below average and current balances quite tight should be enough for some short-term upside,” with the August contract potentially testing $2.77-2.78.

NatGasWeather pointed to midday data showing “a hot ridge building into the East Coast” in early August “but with more data still needing to come on board if the markets are to expect it. Of course, this will only come after a series of weather systems bring showers and cooling to the Midwest, South and east-central U.S. through the middle of next week for regionally lighter demand.”

Production continues to hold down prices despite large storage deficits, the firm said.

“We expect $2.70 will hold” for the August contract until Thursday’s storage report, “although with possible swift price swings in both directions due to the approaching contract expiration Friday,” NatGasWeather said.

Turning to the spot market, SoCal Citygate gave back $20.87 to average $18.37 Tuesday, one day after jumping more than $25 day/day (d/d) to average $39.24, the highest ever recorded by Daily GPI for data going back to 2008.

Southern California Gas Co. (SoCalGas), which has seen its pipeline imports capped at around 2.6 million Dth/d amid multiple ongoing restrictions and which has limited use of its Aliso Canyon storage facility, continued to operate under a system-wide curtailment watch Tuesday.

The National Weather Service (NWS) on Tuesday was warning of “stifling heat” in the Desert Southwest, parts of California and the Pacific Northwest expected to last until late in the week.

“Excessive heat warnings and advisories have been issued across these areas,” NWS said. Phoenix and other hot spots were expected to see high temperatures near 117 degrees Tuesday and 115 on Wednesday. “The Pacific Northwest will also see temperatures in the mid to upper 90s and even 100 in some places.”

Radiant Solutions was forecasting triple-digit temperatures in Burbank, CA, on Wednesday and Thursday, with temperatures averaging about 13-15 degrees hotter than normal.

Genscape Inc. senior natural gas analyst Rick Margolin said Monday’s price spikes came as demand in Southern California reached a summer-to-date high of 3.1 Bcf/d.

“The demand is being driven by increased cooling loads and challenges getting both electrons and gas molecules into the market to satisfy those loads,” Margolin said. “Gas-fired generation has been migrating into” the Southern California market “due to challenges importing electrons because of transmission issues, as well as strong power demand in upstream markets.”

Genscape monitoring showed the California Independent System Operator (CAISO) “actually exported power to the Desert Southwest” on Monday, he said. As more gas-fired electric generation is occuring in Southern California, “the ability to get gas molecules remains challenging due to ongoing restrictions on importing pipelines, high cost” liquefied natural gas imports from Mexico, “competition for gas with upstream markets and restricted access to SoCalGas system storage.”

CAISO was forecasting peak demand Wednesday of 49,665 MW, brushing up against the historical peak of 50,270 MW. Tuesday’s peak demand was expected to total 47,831 MW. The grid operator issued a flex alert asking customers to conserve electricity during the late afternoon and evening hours on Tuesday and Wednesday.

ICE next-day power indices Tuesday showed Palo Verde peak prices dropping off $90.04/MWh d/d to average $258.79/MWh, while next-day SP15 peak prices were down $70.51 d/d to $242.06/MWh.

Other locations in the region saw natural gas spot price declines Tuesday but remained elevated amid the heat wave.

SoCal Border Average shed $1.64 to average $8.84, while points in Arizona/Nevada continued to trade above $10. El Paso S. Mainline/N. Baja fell $1.04 to $10.04 as Kern Delivery dropped $8.64 to $12.08.

Further upstream, most Rockies points eased. Cheyenne Hub fell 6 cents to $2.48.

In West Texas, Waha fell sharply for the second straight day as Genscape on Monday reported maintenance on Natural Gas Pipeline Co. of America this week that’s expected to restrict northbound flows out of the Permian Basin producing region.

Waha dropped 19 cents to $1.83, while El Paso Permian tumbled 23 cents to $1.87.

A force majeure Monday, blamed on a mechanical failure at El Paso Natural Gas Pipeline’s Willcox Compressor in Arizona, impacted exports to Mexico, according to Genscape analyst Josh Garcia.

The force majeure reduced capacity through El Paso’s WILCLAT constraint point to 176 MMcf/d from normal capacity of 323 MMcf/d as of the Intraday 2 cycle, Garcia said.

“El Paso exports to Mexico from Arizona were cut by 78 MMcf/d d/d,” according to Garcia. “The WILCLAT location is north of three Mexico export locations (ICFEAGUA, IDOUGLAS and IMEXWIL) that saw nominations reduced. Flows at FLORIDA were also down 80 MMcf/d d/d, which would signify that there are problems further upstream of WILCLAT.”

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