- Weather uncertainty leads to volatile day for natural gas futures; November gains 8.6 cents
- Steep storage deficits not expected to improve much before peak of shoulder season
- Production could increase faster than most in the market may expect for balance of the year
- Spot gas prices rally as pipeline maintenance events combine with seasonally strong demand
The first day of trading in October was a volatile one as Nymex gas futures rocketed 8.6 cents higher at the front of the curve as traders weighed the impact of shifting weather forecasts that could leave 600+ Bcf storage deficits relatively intact just as the peak of the shoulder season hits. Spot gas prices, meanwhile, were mostly higher amid warmer temperatures in the southern and eastern United States. The NGI National Spot Gas Avg. soared 12 cents to $2.64.
Nymex November futures were strong right out of the gate Monday, trading more than 7 cents higher just after 8:30 a.m. ET. From there, the prompt month climbed to an intraday $3.114 high before eventually settling at $3.094, up 8.6 cents on the day. December rose 8.1 cents to $3.172, and January climbed 7.5 cents to $3.244.
The price volatility began last week with extreme swings in both directions over the course of the week, which were due in part to major shifts in weather outlooks for the first half of October, according to EBW Analytics. Weather forecasts have continued to swing even more violently, with the most extreme swing occurring in Week 2, which shifted much warmer in the East and much cooler in the West and shaved 11.5 gas heating degree days (HDD) but added 12.6 cooling degree days (CDD).
“The net impact of these fluctuations is to leave projected demand nearly unchanged, with a net loss of demand of just 1.5 Bcf for the three weeks combined,” EBW CEO Andy Weissman said.
Despite the lack of significant change in demand, some weather forecasters who do not attempt to estimate impacts on demand “are hyping the increase” in total degree days, Weissman said. “This has sent the market flying higher.”
Indeed, the weather team at Bespoke Weather Services said while it does see more bullish weather risks than last week, forecasts “are still not particularly impressive” with gas-weighted degree days (GWDD) likely coming in below average during the coming couple of weeks. But while supply-demand balances have gradually loosened after being incredibly tight a couple weeks ago, the weather forecaster said “storage concerns are clearly front and center.”
Lower 48 gas stocks as of Sept. 21 stood at 2,768 Bcf, putting inventories 621 Bcf (18.3%) below the five-year average with only a few weeks left in injection season. Year-ago inventories stood at 3,458 Bcf, according to the Energy Information Administration (EIA).
“Though we expect a solidly looser print on Thursday with weather far less impressive last week, such a tight print underscored just how tight demand gets during heat and how difficult it will be to keep the storage deficit from increasing unless weather is able to help,” Bespoke chief meteorologist Jacob Meisel said.
The largest injections of the shoulder season are likely to occur during the next few weeks, and although Bespoke expects some very large builds, it struggles to see any triple-digit builds at this time.
For its part, NatGasWeather said it expected storage inventories to only “slightly improve” through mid-October as the markets wait on more intimidating cold shots into the Midwest and East. Until this occurs, there will be some opportunity for record production to reduce deficits, but only gradually starting with this week’s EIA storage report. Early estimates for Thursday’s EIA report show a build in the mid-80s to lower 90s Bcf, which is near to slightly larger than the five-year average of an 84 Bcf injection.
Importantly, the following week (for the week ending Oct. 5) marks the peak of the fall shoulder season as builds historically begin to drop thereafter as the northern United States experiences stronger cooling after next week. “One fact remains, record production has still yet to improve deficits by a single Bcf since early spring even though production is up an impressive 10 Bcf year over year,” NatGasWeather said.
As for where natural gas prices head next, the forecaster said that the past week of trading suggests that additional volatility lies ahead, where daily moves of 5 to 10 cents are likely to be more common as the winter season approaches. “With $3 being emphatically retaken” on Nymex November futures, “this level will serve as major support with bulls in control until relinquished.” Going forward, the focus remains on if colder weather systems will arrive into the northern United States around Oct. 14-17, which some models are beginning to reflect.
Indeed, the atmospheric pattern is finally trending in a more Nino-like direction, indicating increased cold risks across the northern tier in October but also more sustained warmth in the East through November and likely December, according to Bespoke. “We see warmth across the South and East being more of the default through October as well, and as a result would expect GWDDs that are below seasonal norms though potentially just above the five-year average. Still, it will be hard to get sustained bullish weather until later in the winter,” the forecaster said.
Meanwhile, production may rise faster than the market expects for the remainder of 2018, EBW’s Weissman said, “potentially increasing downward pressure on Nymex futures in the absence of very cold winter weather.”
Going forward, EBW expects Appalachian production growth to accelerate throughout the balance of 2018, offsetting decelerating associated gas growth from Texas and New Mexico due to pipeline constraints in the Permian Basin.
Lingering Heat Fuels Spot Gas
Spot gas prices were mostly stronger Monday as demand was expected to rebound from weekend lows thanks to lingering summer heat in the southern and eastern United States.
The West was expected to see numerous weather systems that bring showers but with mostly mild to only slightly cool conditions, according to NatGasWeather. Heavy rains were also expected into the Southwest as moisture from former Hurricane Rosa arrives.
The southern United States, meanwhile, was forecast to be very warm with highs of 80s to lower 90s, while the East was expected to be mild to warm with high temperatures forecast in the 60s to lower 80s due to strong high pressure. There were some cooler exceptions near the Canadian border, however, as weather systems were expected to provide glancing blows to the area. “Overall, a rather comfortable early October pattern with light to moderate demand,” NatGasWeather said.
Despite the lack of significant demand, solid, double-digit gains were seen in parts of Texas, the southeast, Midcontinent and the Northeast as a slew of pipeline maintenance events created some extra volatility in the market.
In the Northeast, Transco zone 6 NY next-day gas shot up 71 cents to $3.09, while Transco zone 6 non-NY soared 74 cents to $3.065. At the heart of the steep gains was ongoing maintenance between Algonquin Gas Transmission’s (AGT) Stony Point compressor station, which is located in New York, and its Oxford compressor station, located in Connecticut. AGT last Tuesday (Sept. 25) began the maintenance event, which may cut more than 0.5 Bcf/d of mainline flow into New England.
The pipeline work, which is scheduled to continue through Oct. 12, coincides with notable non-gas-fired outages in the power market, which collectively should create a bullish environment for gas prices, according to Genscape natural gas analyst Josh Garcia. Indeed, Algonquin Citygate next-day gas jumped 11 cents to $3.47.
Genscape Inc.’s pipeline sample for New England demand shows that gas burns have been trending downward all month, hitting a month-to-date low of 0.57 Bcf/d on Sept. 29 after peaking at 1.76 Bcf/d on Sept. 4. But this week could see increased bullish support due to a cut of 2,000 megawatts of power generation from Hydro Quebec and planned outages to the 867 MW Millstone Unit 2 and the 1,251 MW Seabrook nuclear plants, Garcia said.
In Appalachia, Columbia Gas posted one of the region’s handful of day/day increases as Columbia Gas Pipeline (TCO) is set to perform maintenance at the Summerfield compressor station on Oct. 2 and 3 along the LXP Segment that will reduce operational capacity to 1,340 MMcf/d. Outside of the maintenance, 14-day average flows through LXP Segment have been 1,426 MMcf/d, with a high of 1500 MMcf/d, according to Genscape.
“Overall demand and CDDs are still projected to be high nationwide, notably including the South, Southeast and Midcon regions,” natural gas analyst Vanessa Witte said. The strong demand was enough to send Columbia Gas next-day gas up 13.5 cents to $2.79.
Elsewhere in the region, Tennessee zone 4 Marcellus spot gas jumped 7 cents to $1.065, and Millennium East Pool rose 9.5 cents to $1.12. Dominion South was down 10.5 cents to $1.21.
Pricing points across most of Texas were stronger as 90-degree temperatures were the norm despite the start of the fall season. The South Texas Regional Average tacked on 14.5 cents to hit $3.07, while East Texas prices edged up about 9 cents on average to $3.005. Constraints in the Permian Basin kept daily prices in West Texas and southeastern New Mexico firmly in the red, with El Paso-Permian shedding a region-leading 15.5 cents to $1.02.
Over in Louisiana, Texas Eastern Gas Transmission (Tetco) was scheduled to conduct an outage from Oct. 2 to Oct. 8 on the 30-inch line between the Union Church and Clinton compressor stations in its East Louisiana tariff zone. Operational capacity at the Union Church compressor station will be reduced to 910 MMcf/d, down from a previous level of 1,081 MMcf/d, according to Genscape.
“This compressor had undergone maintenance related restrictions from Sept. 17 to 26, but flows immediately rebounded to a max of 1,108 MMcf/d in the last few days, translating to a cut of 198 MMcf/d,” Garcia said.
Tetco was expected to continue maintenance that began last month on its 30-inch line from Tompkinsville to Wheelersburg until Oct. 8. That event overlapped with several maintenance events further downstream on the 30-inch line during the last few weeks, including the last Union Church event, according to Genscape. “This confluence of events was a driver of M2 bearishness over that timeframe, and as the same maintenance conditions exist, we should see the same effects in the market,” Garcia said.
Demand has been tailing off in the Northeast as the region fully enters shoulder season while power burns in the Southeast and Gulf Coast will be sustained by remaining heat, driving a big increase in M2/ELA spreads over the last few days, he said.
Indeed, Texas Eastern E. LA next-day gas jumped 9 cents to $2.96, while Texas Eastern M-2, 30 Receipt tumbled more than a dime to $1.16.