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Gordon Seen Destroying Demand as Natural Gas Futures Down Sharply; East Coast Cash Strengthens

Possible demand destruction from a storm along the Gulf Coast and surging Lower 48 production helped drive heavy selling for natural gas futures over the holiday weekend and into Tuesday’s session. Spot prices were mixed as East Coast locations continued to climb on strong September heat; the NGI National Spot Gas Average picked up 13 cents to $2.81/MMBtu.

The October Nymex contract settled at $2.823 Tuesday, down close to a dime from Friday’s settle. November settled 9.7 cents lower at $2.842, while January gave up 8.7 cents to settle at $3.027.

The selling came as traders were keeping tabs on Tropical Storm Gordon, which was expected to strengthen into a hurricane before making landfall along the north-central Gulf Coast Tuesday night.

“A northwestard motion with some decrease in forward speed is expected after landfall, with a gradual turn toward the north-northwest and north forecast to occur on Friday,” the National Hurricane Center said. “On the forecast track, the center of Gordon will move across the northern Gulf of Mexico” Tuesday, “and will approach the north-central Gulf Coast within the hurricane warning area” into the evening before moving inland over the lower Mississippi Valley.

Powerhouse President Elaine Levin said traders bid up a number of energy commodities over the three-day weekend, including heating oil, gasoline and crude oil. This was followed by profit-taking Tuesday as forecasts offered encouraging signs that the storm might not be as potent as previously thought, she told NGI.

Natural gas, however, was a different story thanks to the potential for storm-related power outages to erase demand in a market already expecting the last vestiges of summer to soon give way as production continues to surge, according to Levin.

“I remember in the good old days when a hurricane used to be worth a dime in the other direction, at least,” Levin said. “But now it’s really more of a demand story than a supply story.” If the market continues to grind lower, it could find major support around $2.70, which could present buying opportunities given a storage backdrop that remains bullish, she said.

NatGasWeather similarly attributed the selling to a combination of recent reports showing continued Lower 48 production growth and potential “bearish impacts” from Gordon.

“High pressure is expected to return across the east-central U.S. as next week progresses and where the European model has been notably stronger/hotter with the upper ridge than the rest of the data,” NatGasWeather said. The Global Forecast System “did catch on to a bit of the hotter trend this round, but the markets have yet to show interest...clearly the markets prefer to focus on bearish impacts from Gordon and another fresh record in Lower 48 production.”

While forecasters were pointing to potential demand destruction from the storm, about 232 MMcf/d (9.06%) of natural gas output and about 156,907 b/d (9.23%) of oil production had been shut in by midday Tuesday in the U.S. Gulf of Mexico (GOM) as operators prepared to face Gordon.

The Bureau of Safety and Environmental Enforcement (BSEE), an arm of the Interior Department, estimated the shut ins based on reports submitted by 24 operators as of 11:30 a.m. CT. Estimated shut-in production information is based on the amount of oil and gas the operator expected to produce that day. 

As of Tuesday morning, GOM production was “already showing some declines as” offshore operators were taking “proactive steps to evacuate personnel,” Genscape Inc. analyst Allison Hurley said in a note to clients. The firm’s production estimates showed Tuesday’s Gulf Coast region output dropping to a 50-day low at 10.19 Bcf/d, including a 2.34 Bcf/d drop in offshore GOM.

Turning to the spot market, prices continued to climb across the East Coast amid hot temperatures along the Interstate 95 corridor to start the Labor Day-shortened work week. 

AccuWeather was reporting a high of 85 degrees in Boston Tuesday, which was expected to climb to 86 Wednesday and to 91 by Thursday. The forecaster was calling for New York City to see highs in the upper 80s to low 90s over the next several days, similar to Washington, DC, which was on track for highs in the low 90s Wednesday and Thursday. 

After picking up 49 cents in spot trading Friday, Algonquin Citygateadded another 38 cents Tuesday to average $3.61. Transco Zone 6 New Yorkjumped 28 cents to $3.23. Further south, Transco Zone 5added 17 cents to $3.21.

“Very warm to hot conditions with highs of upper 80s to 90s have returned across the Ohio Valley and East Coast, including across major cities such as Washington, DC, and New York City,” NatGasWeather said. “Demand would be more impressive this week if it wasn’t for the southern U.S. cooling compared to last week due to areas of heavy showers and thunderstorms” aided by the arrival of Gordon.

“There’s a decent cool shot sweeping across the Rockies and Plains with highs of only 60s and 70s, but with only limited impacts on demand,” the firm continued. “Bearish weather trends have occurred for this weekend as several weather systems” are expected to “impact the U.S. with showers and comfortable temperatures” associated with Gordon’s remnants.

Gulf Coast prices were mixed Tuesday, with Henry Hub adding 3 cents to $2.96, while regional averages for East and South Texas each dropped a few pennies.

West Texas, meanwhile, rallied sharply Tuesday, with a number of locations gaining ground after finishing last week about $1.50 back of Henry Hub. El Paso Permian surged 38 cents to $1.81, while Waha jumped 55 cents to $1.84.

El Paso Natural Gas (EPNG) declared a force majeure Tuesday because of an equipment failure at the Puckett Compressor Station in West Texas. Beginning Tuesday, EPNG said capacity at its “PUC WAHA” point would be cut to zero until further notice.

Genscape analyst Joe Bernardi told NGIthat the Puckett force majeure could be partially contributing to the spot price gains in West Texas Tuesday but noted that the event is “only cutting a little less than 100 MMcf/d of intra-Permian flows.

“Similar cuts at that meter in the past have sometimes corresponded with upward price movement, but not on a highly correlated basis,” Bernardi said.

Further downstream, El Paso S. Mainline/N. Baja added 40 cents to $2.64.

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