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September Natural Gas Forwards Climb as Storage Deficits, Returning Heat Steal Spotlight from Rising Output

September natural gas prices rose by an average 3 cents from Aug. 16-22 as long-range weather outlooks showed a much hotter end for August and into early September. Storage concerns remained a bullish catalyst for the market as well, even as the week's storage report delivered an on-target injection.

Nymex September gas futures continued to trade in a tight range during the week as traders struggled to come to terms with persistently low storage inventories and the impact that could have this coming winter, even with record production. Genscape Inc. reported that production on Sunday (Aug. 19) reached a new high of more than 81.76 Bcf/d.

The September contract settled Thursday at $2.964, up 5.6 cents from the previous Thursday's $2.908 settle. October was up 4 cents on the week to $2.953, and the winter 2018-2019 strip (November-March) was up 3 cents on the week to $3.078.

On Thursday, the Energy Information Administration (EIA) reported a 48 Bcf build into gas storage for the week ending Aug. 17, right on target with some market participant surveys, although several estimates clustered in the 50 Bcf range as well.

The prompt month had a muted reaction to the EIA report, with the prompt month nudging one-tenth of a cent higher as the EIA print hit the screen. From there, the September contract climbed as high as $2.982 before eventually settling eight-tenths of a cent higher on the day.

The net of the last two weeks yielded a difference of only 2 Bcf from expectations, indicating a strong reading of balance, according to Bespoke Weather Services, which had projected a 52 Bcf build. Thursday's print, however, may ease some of the bearish fundamental pressure that the weather forecaster expected to see on prices into the weekend.

"The print was not quite as loose as expected with a solid draw across the South still, even with less impressive heat. However, we see in-week loosening that is likely to make next week's print looser and keep resistance fairly firm," Bespoke chief meteorologist Jacob Meisel said.

Genscape, which had estimated a 49 Bcf build, said its daily supply and demand (S&D) model had total supply for the Aug. 13-17 week posting a 0.7 Bcf/d increase from the Aug. 6-10 week, with production having averaged 81.1 Bcf/d, according to senior natural gas analyst Rick Margolin said.

On the demand side, power burns retreated from the previous week and were estimated to have averaged 36.8 Bcf/d, but some of the decline was made up with a 0.3 Bcf/d week/week increase in liquefied natural gas sendout and a 0.2 Bcf/d increase in exports to Mexico, he said.

Broken down by region, the East injected 21 Bcf into gas stocks, the Midwest injected 29 Bcf and the Mountain injected 2 Bcf, according to EIA. The South Central and Pacific regions continued to post withdrawals, pulling 3 Bcf and 1 Bcf, respectively, out of inventories.

As of Aug. 17, stocks sat at 2,435 Bcf, 684 Bcf below year-ago levels and 599 Bcf below the five-year average of 3,034 Bcf, EIA said. The deficit to year-ago storage levels shrank by 3 Bcf, while the deficit to the five-year average grew by 4 Bcf.

The market is in uncharted territory with the storage trajectory far below recent norms, EBW Analytics said. On paper, supply gains and loosening supply/demand fundamentals are greater than the expected mid-November storage deficit.

"Still, the market may still place a risk premium on the upcoming winter futures," particularly if supply gains over the next four to six weeks are weak or long-term forecasts from leading weather vendors shift in a colder direction, EBW CEO Andy Weissman said.

Indeed, weather continues to rule the market. After several days of increasing heat in long-range weather models, a flip midweek to slightly cooler trends for the end of August/early September led to a small decline in Nymex futures on Wednesday. Winter prices, though lower, saw more modest decreases as storage concerns remained.

Regardless of the minor shift in the forecast, the May-September cooling season is now projected to be the hottest in history, according to EBW. This follows the coldest April since 1980, "lining up the current injection season as one of the most bullish on record," Weissman said.

During the fall shoulder season, however, weather-driven demand is expected to ease significantly, and it often loosens the market supply/demand balance, putting downward pressure on both spot market prices and Nymex gas futures, he said.

This year, though, lingering deficits in the East and Midwest storage regions "may imply that risk-averse local distribution companies (LDC) may be planning above-normal fall injections to help bridge deficits ahead of the upcoming winter heating season," Weissman said.

As of Aug. 17, inventories were more than 100 Bcf below the five-year average in the East and more than 150 Bcf below the five-year average in the Midwest, EIA data show.

Although storage deficits versus the five-year average had begun to narrow in recent weeks in both regions, early August heat prompted an increase in local power sector demand and an uptick in deficits.

Together, the current storage deficits versus the five-year average in the East and Midwest regions amount to 1.7 Bcf/d over the upcoming November-March withdrawal season, Weissman said. Although both regions are likely to enter the upcoming withdrawal season at a deficit, it would be surprising if these storage deficits versus the five-year average did not narrow during the fall season, he said.

"Instead, risk-averse LDCs are likely to build inventories at a faster-than-average pace to help assure supply adequacy during the upcoming winter," he said. Therefore, this increased injection activity may help support spot market prices, helping to limit the extent of likely declines in Nymex natural gas futures over the next six to 10 weeks.

West Getting Relief From Heat; Prices Crash

Taking a closer look at other markets across the country, most pricing locations followed the lead of the Nymex futures strip, posting small gains of a nickel or less across the curve. Some notable exceptions were in the West, which, continued to see dramatic declines on much milder weather outlooks for the region after a scorching summer.

In fact, the same weather pattern that is expected to pump heat into the eastern United States beginning late into the weekend (Aug. 25-26) is forecast to send cooler weather with spotty rain, high-elevation snow and gusty winds into the West.

"We expect a major shift in the jet stream to develop," AccuWeather lead long-range meteorologist Paul Pastelok said. The jet stream is forecast to dip southward in the western United States, which would allow cooler air to drain from northwestern Canada and the northern Pacific Ocean.

The most substantial change in the weather is forecast to be across the Northwest, although some cooler and less humid air is also likely to reach parts of California and the Southwest, he said. While temperatures soared into the 90s and even low 100s in parts of the West earlier this month, outlooks showed highs would be slashed by 30-40 degrees in the Northwest. Highs are expected in the 60s and 70s in many of the low elevations and the 40s and 50s over the high country, Pastelok said.

Accompanying the cooler air may be a round or two of cool showers and even some wet snowflakes over the high country of the northern Rockies and perhaps the Washington Cascades, according to AccuWeather.

Given the cooler outlook, SoCal Citygate September forward prices plunged 70 cents from Aug. 16-22 to reach $5.194, a $1-plus premium over spot gas prices for Friday's gas delivery, according to Forward Look. October tumbled 76 cents to $3.75, while the winter 2018-2019 strip was down 68 cents to $4.75.

Other western pricing hubs also declined. Malin September fell 3 cents to $2.538, as did October, which landed at $2.444. The winter 2018-2019, however, bumped up a penny to $2.65.

Northwest Sumas September was down a nickel from Aug. 16-22 to reach $2.268, but October climbed 3 cents to $2.18 and winter 2018-2019 rose a penny to $2.74, Forward Look data show.

In the Northeast, the return of hot weather, regional storage deficits and pipeline maintenance lent support to markets there.

Millennium Pipeline was scheduled to conduct a new tie-in at Huguenot on Tuesday (Aug. 28) that would affect the Wagoner East pipe segment in Orange County, NY, until Sept. 18, Genscape said.

For the first two days (Aug. 28 and 29) and last two days (Sept. 24 and 25) of this period, Millennium estimated restrictions of up to 37%. For the remaining days, segment restrictions would vary between 15% and 35% of flows.

Thirty-day average flows (excluding prior maintenance) through the Wagoner East Compressor Station have been 766 MMcf/d, maxing out at 806 MMcf/d, Genscape natural gas analyst Dominic Eggerman said. This tie-in can be expected to reduced flows by 224 MMcf/d during the first and last two days, and from 34-207 MMcf/d otherwise.

A previous maintenance event on the upstream Wagoner West segment reduced operational capacity on Wagoner East to 485 MMcf/d from Aug. 3-6. Flows through Wagoner East were reduced by 291 MMcf/d (to around 485 MMcf/d) during this time.

The impact of the forthcoming tie-in is expected to be of similar magnitude, Eggerman said. Flow reductions on the Ramapo interconnect on Algonquin Gas Transmission (AGT) have correlated with past reductions on Wagoner East. "Therefore we can expect similar restricted gas flows" to Algonquin from Millennium starting on Tuesday, he said.

Additionally, upstream flows at Stagecoach East in Broome County, NY, experienced similar reductions in flow (194 MMcf/d) during the Wagoner West maintenance. Maintenance events last week on AGT at the Stony Point compressor station in Rockland county, NY, have also affected flows on Millennium in a similar fashion, according to Eggerman.

Given the pipeline restrictions and the forecast for hot weather during the schedule time of some of the work, Algonquin Citygates September forward prices jumped 16 cents from Aug. 16-22 to reach $3.181. October was up 7 cents to $3.045, and the winter 2018-2019 was up 7 cents to $7.86, according to Forward Look.

Transco zone 6 NY September climbed 8 cents to $2.787, October rose a nickel to $2.702 and the winter 2-18-2019 picked up 4 cents to hit $6.06. Other points along the Transco line put up slightly more significant increases.

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