- Nymex natural gas futures fall as much as a dime before buyers step in to trim losses to just 1.7 cents
- Mild weather in store for mid-November combined with strong production and loose storage data to put the ball back in market bears’ court
- Low prices at back end of futures curve catching the attention of at least one producer, perhaps foreshadowing a larger pullback in production growth
- Spot gas prices tank as mild fall weather saps demand
Natural gas bears looking for confirmation from weather outlooks for mid-November got what they needed Friday as morning models finally converged in showing warmer weather.
The milder forecasts, near-record production and loose storage data combined to send the Nymex November gas futures contract as much as 10 cents lower, at which point buyers stepped in to eventually lift the prompt month to a $3.185 settle, down just 1.7 cents on the day. December slid 3.1 cents to $3.225, and the winter strip (November-March) fell 2.4 cents to $3.174.
Spot gas prices continued to bleed as mild fall weather was expected to blanket much of the United States over the next several days. Losses were most substantial in the Rockies, but double-digit declines were also the norm across the Southeast and Texas. The NGI Spot Gas National Avg. fell 18.5 cents to $3.035.
On the futures front, the November contract was almost a nickel lower just before 9 a.m. ET Friday as climate guidance showed that the middle of November would have sizable warm risks across the East, according to Bespoke Weather Services, which agreed with the guidance. “European guidance similarly shows any cold shot being fleeting in the medium range, as though it may briefly boost heating demand, it is unlikely to stick around, and the upstream tropical forcing signal favors further warming to the forecast.”
Midday data continued to favor a milder Nov. 6-11 set-up, with much of the country warming above normal, “although the data has been struggling and inconsistent regarding the potential for a weak cool shot across the North,” NatGasWeather said. Going forward, the focus remains on how long this milder pattern will last, “with our data still suggesting around Nov. 12-13 before the next opportunity for more impressive cold blasts to return.”
Weather aside, the market on Friday continued to weigh the implications of Thursday’s storage report. The Energy Information Administration (EIA) reported a 58 Bcf injection into storage inventories, but that included a 5 Bcf reclassification that decreased working gas, therefore implying a 63 Bcf build for the week.
Genscape Inc. analyst Eric Fell expressed skepticism over the EIA data, pointing to the large adjustment and the extent to which the 63 Bcf implied flow missed to the high side of most estimates. Consensus had clustered around an injection in the low 50s Bcf, with a range of 39 Bcf to 66 Bcf.
Compared to degree days and normal seasonality, the 63 Bcf implied injection was about 6.6 Bcf/d loose versus the five-year average, as degree day totals increased by 30 week/week (w/w), but the storage injection only fell by 18 Bcf versus last week’s reported injection, he said.
“Relative to degree days and normal seasonality, this is the loosest weekly storage number of the last five years, and looser than all but a handful of weekly stats going all the way back to 2005.”
Added looseness in the week’s stat was driven by an unusually large w/w decline in power generation (driven by a large w/w decline in cooling degree days), and the fact that this was the first big cold shot of the season, Fell explained. “Residential/commercial demand never performs as well as raw weather models would imply in the first cold event.”
Inventories as of Oct. 19 stood at 3,095 Bcf, 606 Bcf less than last year at this time and 624 Bcf below the five-year average of 3,719 Bcf.
While the inventory deficit to the five-year minimum increased with this week’s EIA report, “weather-adjusted, the market was about 3.0 Bcf/d oversupplied,” according to Tudor, Pickering, Holt & Co. (TPH). “U.S. dry gas production continues to ramp up about 0.85 Bcf/d w/w to 86.5 Bcf/d as the Northeast has increased 3.1 Bcf/d since the end of June.”
Indeed, the looser storage data and growing production outlook appeared to ease the market’s fear about supply this winter. At current Nymex strip prices and in Weather Decision Technologies’ most likely weather scenario, U.S. storage inventories are expected to end the injection season slightly above 3,200 Bcf, according to EBW Analytics. The projected mid-November inventory would be by far the smallest since 2010, 618 Bcf (16.1%) below the eight-year average and almost 550 Bcf below year-ago levels.
“Although the market appears comfortable with below-normal storage going into the heating season, bullish weather shifts -- and particularly any freeze-offs this winter -- could still prompt higher cash and futures prices,” EBW CEO Andy Weissman said.
Meanwhile, at least one U.S. producer is starting to slow the growth engine “as economics hardly justify drilling on fully loaded returns, while depressed equity valuations and tail end of volume growth commitments allow industry participants to shift capital allocation from the drillbit to shareholder returns,” TPH analysts said.
“This is exactly what the gas market needs as we, and the majority of investors we talk to, remain concerned around supply/demand dynamics for natural gas moving into 2019 and believe that ultimately, growth needs to be cut in order to put a floor on the market,” analysts said.
With Nymex prices now approaching $2.50 in 2021 and beyond, “we think the vast majority of our gas coverage universe will need to scale back capital plans if corporates are to deliver on returns-focused growth,” TPH said. For context, EQT Corp.'s new growth guidance of “mid-single digits” versus 10-15% previously will strip out an average of roughly 1.1 Bcf/d from the Northeast production profile over the next five years, according to the analyst.
Mobius analysts noted that another warmer-than-normal start to the winter season would likely cause “panic selling” at the front of the curve, which could push contracts further out the curve back down near the $2.50 mark. “If the front of the curve collapses and the back presses $2.50, we believe the fundamental impact would be swift, and the market would quickly realize how much price elasticity remains in the market on moves lower,” analysts said.
Soft Weekend Sends Spot Gas Down Again
Spot gas prices continued to decline Friday as most of the country was due for relatively mild weather. The exception was in the East, where a mild and wet weather system was expected to track up the coast Friday and Saturday with gusty winds and rain, according to forecasts.
Some of the moisture fueling the heavy rain can be traced back to former Hurricane Willa, which made landfall in northwestern Mexico this past Tuesday. The storm heading northward along the Atlantic coast is not Willa, but rather a new storm that formed along the upper Gulf Coast. Willa met its demise over the high mountains of Mexico, according to AccuWeather.
"Right now it looks like the worst conditions in terms of coastal flooding will occur during the high tide cycle during Saturday morning and midday from the upper mid-Atlantic coast to southern New England," AccuWeather senior meteorologist Dave Dombek said. "The winds may be strong enough, with gusts from 40-60 mph for a few hours, to break tree limbs and cause sporadic power outages," he said.
In terms of snow, since the coldest air was expected to be on the way out as the storm moves up, wintry precipitation and most of the accumulation was likely to be mainly limited to the northern tier, according to AccuWeather. "Accumulating snow is not likely over most of the central Appalachians," senior meteorologist Brian Wimer said.
Much of the area at risk for snow and perhaps sleet will be the same as those that received snow from the storm of the past week, which brought one-to-12 inches of snow over parts of northern New England and locally higher amounts over the Presidential Range, the forecaster said.
A small, but quick-moving storm may bring a period of rain and perhaps wet snow to part of the region during Sunday night and Monday, and there was a chance that the first few snowflakes of the season fall on the Interstate 95 corridor, AccuWeather said.
Despite the prospects for a small amount of pre-winter snow, Northeast spot gas prices continued to fall from their recent highs. Algonquin Citygate tumbled 26.5 cents to $3.165, and Transco Zone 6 NY dropped 19.5 cents to $3.125.
Appalachia prices posted decreases of more than a dime across the region, while losses in the Rockies ranged from just 3.5 cents at CIG to 46.5 cents at Transwestern San Juan. Declines at both of pricing locations were related to ongoing maintenance events on Colorado Interstate Gas and Transwestern Pipeline.
The pipeline work on Transwestern also continued to pull down Permian Basin prices, with Friday’s deals well below $2. Still, some of that loss was traced to the lack of demand in and around the region as prices across the West, Texas and the greater Southeast posted double-digit drops.
North of the border in Western Canada, several maintenance events across TransCanada Corp.’s NGTL system continued to wreak havoc on the market. TPH analysts noted Friday that if one added up NOVA/AECO cash prices over the seven days through Thursday, the C$3.78 ($2.91) sum would still be less than the daily average spot price at most major U.S. hubs.
Friday’s transactions didn’t fare any better as NOVA/AECO spot gas averaged just C38 cents after tumbling 24.5 cents.
“Large swaths of maintenance across the entire NGTL system are limiting exports and the ability to inject into storage, leaving the gas stranded without a buyer,” TPH analysts said. “Of course, this all changes when we flip over to withdrawals, which can't come soon enough for the AECO-exposed producers.”
Temperatures in Calgary for the week ahead were forecast to dip below zero, which could mark the start of the winter gas rally, TPH said. In total, 2 Bcf crept into Western Canada storage over the past few days, putting storage 13% below the five-year average. On the other side of the country, Dawn injected 1 Bcf, compared to a norm of 6 Bcf. Still, Dawn storage now sits directly in line with the five-year average, TPH said.