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Natural Gas Futures Reverse Monday’s Gains Amid Production Concerns

  • September down 1.5 cents to $2.782, October down 1.9 cents to $2.798
  • “With this weak strip and production so heavy,” $2.85 “very likely to hold this week,” says Bespoke
  • Market expects “overall supply length will compensate for the lack of supply stored in the ground”: Energy Aspects
  • Constraints on NGPL, Enable help sink Midcontinent spot prices 

Natural gas futures retreated Tuesday, giving back the prior day’s gains as record-level production and potential cooling toward the back half of August limit upside for prices. In the spot market, pipeline constraints contributed to lower prices at a couple Midcontinent locations as points in hot Southern California gained; the NGI National Spot Gas Average added a nickel to $2.78/MMBtu.

The September Nymex futures contract settled 1.5 cents lower at $2.782, venturing as high as $2.831 before declining into the settle. October dropped 1.9 cents to settle at $2.798, while January settled at $3.038, down 1.9 cents.

Price action Tuesday confirmed that production remains the market’s primary focus, according to Bespoke Weather Services.

The front month ran into firm resistance Tuesday, “as the strip deteriorated through the day on production concerns, and weather model guidance was a touch less impressive, with the whole strip gradually declining...and selling on very heavy volume into the settle,” Bespoke said. “...Given overnight weather trends and very tight burns we had expected $2.85 resistance to be tested, but following back-to-back days of intense selling into the settle and a much weaker strip” Tuesday “we are less confident.”

Production should dip down with the start of the new month, and model guidance maintaining heat over the next two weeks could help prices run back up to $2.82-2.85, according to the firm.

“But with this weak strip and production so heavy, we see $2.85 as very likely to hold this week, especially with forecasts likely to cool into the second half of August,” Bespoke said. “...Weather is supportive now but is likely less supportive by next week, and with production where it is we need weather to prop prices up.”

The Energy Information Administration (EIA) on Tuesday updated its monthly production data, showing U.S. natural gas output for May setting a new all-time record. EIA said May 2018 production averaged 80.4 Bcf/d (2,491 Bcf total), an 8.6 Bcf/d (12%) increase year/year (y/y) and the highest total recorded by the agency for data going back to 1973.

The EIA data does little to undercut the thesis that year/year supply growth will offset a year-on-five-year inventory deficit that currently sits well above 500 Bcf.

“Our reference case outlook still centers on end-October storage carryout near 3.45 Tcf,” global consulting firm Energy Aspects said. “Such a low level will result in heavy y/y shortfalls in regional stocks, which have certainly been exacerbated by recent above-normal temperatures. However, what has kept the market in a relative state of complacency in the height of cooling season is an acute upward trajectory in output over the past several weeks and an outlook for record production throughout the heating season.

“That projected supply cushion is fueling a market perception that overall supply length will compensate for the lack of supply stored in the ground ahead of winter,” Energy Aspects said. “Given how much supply growth will be sourced from Appalachia and Texas/Midcontinent, the question is to what extent production growth will be able to compensate for those y/y storage deficits, especially given the bulging withdrawals seen in the Northeast last winter as well as freezing conditions in Texas.”

Turning to the spot market, a couple of Midcontinent points saw discounts Tuesday amid reports of constraints this week expected to trap production in the region.

On Monday, Genscape Inc. noted a force majeure declared on NGPL’s system starting Wednesday and expected to last through the end of the month that is expected to impact around 380 MMcf/d of volumes bound for the Midwest.

Meanwhile, Enable was planning facility upgrades this week in Oklahoma, requiring about 0.65 Bcf/d of Midcontinent production to be shut in or rerouted Wednesday through Thursday, Genscape Inc. analyst Allison Hurley said Tuesday.

“Enable will be conducting a planned install of its Byars Lake Compressor Station (CS) tie-in along its Line AD (which is the mainline that flows gas west to east across Oklahoma), in Enable’s West 2 Pooling Area upstream of the Allen CS,” Hurley said. “...During the maintenance, Line AD will be isolated upstream of the Allen CS” in Hughes County, OK.

“...In the past two weeks, Enable’s West 1 and 2 pooling areas have averaged net receipts of 656 MMcf/d, which implies that this 656 MMcf/d will either need to be rerouted or will be shut in” as supplies sourced west of the Allen CS are prevented from reaching delivery points east of the station, according to Hurley.

“...There are five interstate interconnects with available delivery capacity to reroute gas, including ANR, El Paso, Northern Natural Gas and Panhandle Eastern -- making up a total combined available delivery capacity of 414 MMcf/d. An additional 608 MMcf/d of available reroute capacity exists onto intrastates,” primarily on Enable Oklahoma Intrastate Transmission.

NGPL Midcontinent fell 26 cents Tuesday to $2.14, while Panhandle Eastern tumbled 12 cents to $2.25. Meanwhile, Enable East jumped 17 cents to $2.69.

With heat expected to persist in the region -- albeit less intense compared to last week -- prices gained in Southern California and the Desert Southwest. SoCal Citygate jumped 53 cents to $8.75, while SoCal Border Average gained 3 cents to $4.22. Kern Delivery added 47 cents to $4.94.

Radiant Solutions was calling for highs in Burbank, CA, to hover in the mid to low 90s through the end of the week, around 5-9 degrees hotter than normal. Southern California Gas was estimating total system demand of just under 2.6 million Dth/d for Tuesday, expected to ease to around 2.4-2.5 million Dth/d Wednesday and Thursday. Demand on Monday reached 2.66 million Dth/d, surpassing the import-constrained system’s total receipts of 2.59 million Dth/d.

August bidweek trading appears to have priced in some of the upside risk observed in Southern California and the Desert Southwest after a heat wave last week sent spot prices soaring. Through Day 5 of bidweek, SoCal Citygate was averaging $9.61, with trades as high as $10.50, while Kern Delivery was averaging $6.06, according to NGI’s Bidweek Alert.

Points in the Northeast strengthened as Radiant Solutions Tuesday was expecting temperatures to warm to slightly above-normal over the next several days in cities including New York, Boston and Philadelphia, with highs in the mid to upper 80s. Tennessee Zone 6 200L added 10 cents to $2.86.

“Weather systems with showers and thunderstorms will track across the Midwest and east-central U.S. this week with comfortable highs of 70s to lower 80s, including into portions of the southern U.S. for lighter demand,” NatGasWeather said in its one- to seven-day outlook Tuesday. “Hot upper high pressure continues to dominate most of the West and South with highs of 90s to 110 degrees, hottest from California to Texas.

“Hot high pressure will expand across the eastern half of the U.S. with 90s gaining ground for increasing national demand late this week through early next week.”

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