Clearer signs of a cold front in mid-October were enough to send natural gas futures rallying for a second day as traders grappled with the very real possibility that storage inventories could sit as low as 3.25 Bcf at the start of the premium winter season. The Nymex November gas futures contract rocketed 7.2 cents higher to $3.166 even as gas production continued to set records.
Spot gas prices also strengthened amid growing demand across the country, with the West, Rockies and Northeast posting some of the largest day/day gains. The NGI National Spot Gas Avg. rose 16 cents to $2.80.
As for futures, the November contract opened the session just above Monday’s intraday high and then surged as high as $3.194 before ultimately settling at $3.166. “Fundamentally, the market has seen little change compared to dynamics present throughout injection season, however, historically low inventory has finally become a focal point ahead of the winter withdrawal season,” Mobius Risk Group said.
If anything, changes to the weather forecast over the past 10 days have been directionally bearish, and production has remained strong, Mobius analysts said. The latest weather models continued to focus on a shot of cold air in the middle of October that moves from the Midwest into portions of the South and East.
As the cold air progresses eastward, models continue to show it gradually weakening, indicating that it may struggle to pull heating demand significantly above seasonal averages, according to Bespoke Weather Services. Still, gas-weighted degree days (GWDD) will easily beat out the five-year average with such cold risks, although demand may be a bit lower first, it said.
The cold is then seen lingering into Week 3, with any colder shots centered on the Midwest. “We do see risks that the extent of cold is a bit overdone into the East, as most models attempt to keep at least weak ridging across the Southeast that fits with the pattern,” Bespoke chief meteorologist Jacob Meisel said. The result may be GWDDs that are a touch above average, but not likely running far above seasonal averages.
Meanwhile, “weekly storage data from last Thursday looms over market bears,” Houston-based Mobius said. Indeed, last Thursday’s (Sept. 27) Energy Information Administration storage inventory report sent shockwaves through the market as a well-below consensus injection left inventories trailing historical levels by nearly 20%. “Unless the next six reports average 100 Bcf or more, we will start withdrawal season below 3.35 Tcf,” Mobius said.
For reference, market expectations for last week’s storage injection were in the mid-50s Bcf, and end-of-season estimates in early September were above 3.35 Tcf, the firm said. “In reality, there is a strong possibility withdrawal season begins with less than 3.25 Tcf in storage.”
That theory was not being taken lightly as the largest gains were seen in the winter contracts. The Nymex December contract jumped 6.7 cents to $3.239, January rose 6.8 cents to $3.312, February edged up 6 cents to $3.215 and March tacked on 4.2 cents to reach $3.009.
Markets have started to price in availability risk for winter because of low natural gas stockpiles, a situation that developed partly because of summer/winter spreads not creating much incentive for merchant storage injections, along with above-normal cooling demand this summer, according to Energy Aspects. Analysts long-ago described 3.45-3.50 Tcf as the so-called “critical balancing point” for winter, but its projected 3.26 Tcf carryout based on extended weekly balances is well below that threshold.
“Our forecast end-of-season carryout has gradually been shaved down as injections have been modest despite an ongoing series of production records. Supply growth beyond our forecast allows a little wiggle room in our pre-season inventory floor, but not 200 Bcf worth.”
Early estimates for this Thursday’s storage inventory report point to an injection in the mid to high 80s Bcf, near to slightly above the five-year average build of 84 Bcf.
With cold already creeping into weather forecasts, this puts a lot of pressure on record production improving deficits in November and early December before more ominous polar air threatens, NatGasWeather said. Analysts said they “expect the nervousness of the markets are going to produce volatile sessions in the weeks ahead where sharp daily price swings of 5-10 cents will be common, and the direction dependent on colder or warmer trends.”
Spot Gas Rally Continues
While Nymex futures gains were noteworthy on their own, spot gas prices also moved meaningfully higher Tuesday, with the country’s midsection posting day/day increases of more than 20 cents at some pricing hubs as demand was expected to remain unseasonably strong.
Much of the country east of the Plains was forecast to be warmer than normal this week with high temperatures expected in the 80s to lower 90s across the southern United States and highs forecast in the upper 60s to lower 80s over the Ohio Valley and Mid-Atlantic, including large portions of the Northeast, according to NatGasWeather. Locally cooler conditions were expected near the Canadian border, where weak systems were expected to produce showers.
The West, meanwhile, was expected to cool from recent heat as weather systems arrive, including heavy rains over the Southwest as remnants of tropical system Rosa track inland. Stronger and colder weather systems were forecast to hit the West this weekend and next week, likely increasing heating needs, the forecaster said.
Strong upper high pressure, however, is expected to remain anchored across the eastern half of the country for warmer-than-normal temperatures and mostly light demand, except in portions of the southern United States where forecast highs of 80s to near 90 degrees are expected to drive late-season cooling needs. “...what will be most important to the natural gas markets is just how much colder air out of Canada arrives into the northern and central U.S. Oct. 14-17, which the weather models have been inconsistent with,” NatGasWeather said.
For now, the increased demand was enough to send the Midcontinent Regional Avg. up more than 15 cents to $2.62. Panhandle Eastern spot gas shot up 23 cents to $2.475, and NGPL Midcontinent jumped 24.5 cents to $2.53.
Appalachia spot gas staged a comeback of sorts as prices rocketed nearly 40 cents higher on average. Dominion South next-day gas traded at $1.385, up 17.5 cents on the day. Tennessee Zone 4 Marcellus rose 26.5 cents to $1.33, and Texas Eastern M-3, Delivery shot up 37 cents to $1.615.
Texas Eastern M-2, 30 Receipt was up 24 cents to $1.40 after Texas Eastern Gas Transmission delayed the Union Church maintenance event that was originally scheduled to begin Tuesday. The event is now currently scheduled to run between Oct. 9 and Oct. 22.
“If heat driven demand in the Gulf Coast remains over the next week, impacts are likely to still be around 200 MMcf/d,” Genscape natural gas analyst Josh Garcia said. The current maintenance event taking place on the 30-inch diameter line is scheduled to finish on Oct. 8, but other pipeline work in M2 and M3 are scheduled to be in place by then, creating more bearish pressure on M2, he said.
Nuances in regional storage balances and transportation constraints have caused jarring price changes in regional markets over the past several weeks, including in Appalachia, according to Mobius. A recent notice from Dominion Energy Transmission Inc. said because of “historic lows” in its inventory levels, it may need to limit some storage activity to protect the operational integrity of its system and meet firm customer commitments.
“The white flag has already been waved on deliverability concerns, even before the heating season is underway,” Energy Aspects said.
But the latest storage inventory report from Dominion reflected a build of 12 Bcf in stocks. If extrapolated over the remaining six weeks of injection season, this would lead to record high inventory, Mobius said. “As a result, downward pressure may persist in Appalachia until November,” analysts said, noting that increased volatility could remain a daily factor for the remainder of the shoulders season.
In the Rockies, gains of nearly 40 cents were fairly common throughout the region as demand was set to increase steadily throughout the rest of the week. Genscape projected regional demand to hit 1.39 Bcf/d on Wednesday and 1.52 Bcf/d by Friday. Next week, demand is expected to remain elevated, peaking at 1.65 Bcf/d on Oct. 12.
Kingsgate next-day gas jumped 38 cents to $2.465, Opal surged 36.5 cents to $2.58 and CIG rose 31 cents to $2.505. Some losses at points along the El Paso Natural Gas pipeline as well as at Transwestern San Juan left the Rocky Mtns. Regional Avg. up nearly 20 cents to $2.225.