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Strong Cash Prices Help Natural Gas Futures Bulls Seize Momentum

  • October rallies 11.9 cents to $2.933, November up 11.7 cents to $2.896
  • “Today, cash was leading futures,” says INTL FCStone’s Saal
  • “Cash strength surpassed all expectations” as nuke outages tightened power burns, says Bespoke
  • Duke’s 1,870 MW Brunswick plant still down Tuesday,; Transco Zone 5 spot prices surge 26 cents to $3.38

Don’t call it a comeback, but natural gas futures bulls reasserted themselves Tuesday, seizing on strong cash prices and signs of continued weather-driven demand to rally a market in need of a mild shoulder season to refill depleted stockpiles. Spot prices surged in the Mid-Atlantic as West Texas cash basis weakened; the NGI National Spot Gas Average added 3 cents to $2.75/MMBtu.

October Nymex futures surged 11.9 cents to $2.933, a massive rally in the context of what had been a range-bound market. November picked up 11.7 cents to $2.896, while January added 9.8 cents to $3.05.

Storage inventories sitting below the five-year minimum with only a few weeks left in the injection season might typically drive a futures rally this time of year, but the backwardation in the market suggests that’s not what happened Tuesday, according to INTL FCStone Financial Inc. Senior Vice President Tom Saal.

Physical prices at Henry Hub climbed 7 cents to average $2.97 Tuesday, continuing to trade ahead of the October contract. Late last week, day-ahead prices at the Hub were trading around 15-20 cents ahead of prompt-month futures.

“Today, cash was leading futures. That’s not always the case,” Saal told NGI. Even with currently lean stockpiles, “they’re pulling gas out of storage, I can tell you right now. I can pull the gas out of storage and sell it for $3...and I can replace it with gas that’s cheaper...

“Based on historical levels, we’re low on inventory. But the market believes that production is so robust that we’re not going to need the storage we’ve had in years past.”

Saal noted bullish impacts in the aftermath of former Hurricane Florence, particularly from lingering nuclear outages, as helping drive the strength in the physical market.

According to the Energy Information Administration (EIA), Duke Energy’s 1,870 MW Brunswick nuclear plant in North Carolina remained completely offline Tuesday, while forecasts showed hot temperatures over the next few days in the Southeast and Mid-Atlantic.

Meanwhile, as of 10 a.m. ET Tuesday about 332,000 customers remained without power after Florence, mostly in North Carolina, with affected utilities having already restored power to 1.6 million customers since the storm hit the East Coast, according to the Edison Electric Institute.

Spot prices at Transco Zone 5 surged 26 cents to $3.38 Tuesday after seeing similar gains on Monday. Further north, Transco Zone 6 New York also rallied on the day, jumping 19 cents to $3.27.

Remnants from Florence were expected to continue dropping showers over the Northeast Tuesday, according to NatGasWeather.

“In the storm’s wake, very warm high pressure will continue expanding to dominate most of the country, hottest across the southern U.S. where highs will reach the upper 80s to mid 90s,” the firm said. “It will also be warmer than normal over most of the northern U.S., but for this time of year it means relatively light demand as highs reach the 70s and 80s.”

Bespoke Weather Services said it had been looking for strong cash prices heading into Tuesday’s session.

“Yet cash strength surpassed all expectations as burns were revised even tighter amidst nuclear plant outages in the Southeast and wind generation that remains limited,” Bespoke said. “Combined with production off highs and short-term intense heat it was enough for cash to spike above $3 and pull the front of the strip higher with it…Our next significant resistance level sits all the way up at $2.98, and with heat lingering through Thursday some cash strength is expected” Wednesday.

However, Bespoke analysts said Tuesday produced “a ‘perfect storm’ of bullish fundamental factors between intense short-term heat, long-range cold risks for early October, tighter burns, lower production, nuke outages” and a flat October/November spread.

Bespoke does not expect long-range cold risks in recent guidance “to be sustained enough through October to severely elevate heating demand.”

Meanwhile, estimates so far for this week’s EIA storage report suggest the year-on-five-year-average deficit could shrink modestly as the year-on-year deficit widens.

The Desk’s Early View storage survey produced an average 80.7 Bcf build for the week ended Sept. 14 based on responses ranging from 50 Bcf to 94 Bcf. Intercontinental Exchange (ICE) EIA financial weekly index futures settled Monday at a build of 83 Bcf. Last year, EIA recorded a 96 Bcf injection for the period, while the five-year average is a build of 76 Bcf.

Meanwhile, traders of ICE end of storage index futures continue to lower their expectations for inventories at the start of withdrawal season, as the contract dropped 4 Bcf Monday to settle at 3,321 Bcf.

Tuesday’s rally showed the market giving more weight to potential demand upside versus the continued Lower 48 supply growth that has been pressuring prices for months.

Analysts expect that growth to continue, driven by what global consulting firm Energy Aspects recently projected as a “deluge of Appalachian supply” over the next few weeks.

“After hitting weekly production records every week since late July, Appalachia receipts stagnated somewhat at the start of September,” Energy Aspects said. “Receipts of 29.5 Bcf/d in the region were up by just 0.1 Bcf/d” week/week (w/w) as of late last week, “after the week ending Sept. 7 saw regional receipts fall by 0.1 Bcf/d w/w.”

The firm attributed some of the slowdown in growth to maintenance on Leach XPress and to the recent explosion on an Energy Transfer Partners LP gathering system in western Pennsylvania.

“Even with this recent stagnation, Appalachia output of 29.4 Bcf/d so far in September is still up 0.6 Bcf/d month/month and 5.0 Bcf/d year/year” from new infrastructure additions, including the start-up of Rover’s Majorsville and Burgettstown laterals, which “mark two steps forward to push past the recent one step back.”

Looking at other cash moves Tuesday, prices strengthened across most of the Midwest in line with the gains at Henry Hub as Radiant Solutions was calling for temperatures in Chicago to remain well above normal this week, with highs potentially reaching into the low 90s by Thursday. Chicago Citygate added 8 cents to $2.97.

Meanwhile, West Texas saw weakening basis differentials as prices moved in the opposite direction from the modest gains posted throughout the rest of the Lone Star State.

Waha gave up 3 cents to $1.67, while El Paso Permian shed a penny to $1.73.

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