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Winter Arrives for Natural Gas Markets as Futures, Spot Rally Sharply on Medium-Range Cold

Intense colder trends in the medium-range forecast over the weekend had natural gas markets bracing for winter Monday; futures rallied decisively, with the prompt month soaring to its highest price level since January 2018. Physical markets followed suit with gains of 30-50 cents the norm across much of the Lower 48. The NGI Spot Gas National Avg. climbed 32.5 cents to $3.180/MMBtu.

As forecasts over the weekend pointed to significantly more intense cold arriving later this week and into next week, the winter contracts gapped up sharply Sunday and continued to rally from there. The December contract settled at $3.567, up 28.3 cents from Friday’s settle after trading as high as $3.576. January settled 26.5 cents higher at $3.575, while February settled at $3.407, up 21.5 cents.

With inventories sitting at historically low levels for this time of year, surging Lower 48 production growth wasn’t enough to rescue the bears Monday as the market got its first real glimpse of significant winter heating demand.

Monday proved a “vicious day for those that held short over the weekend,” NatGasWeather said. “...Overall, the coming series of cold shots,” expected to arrive later this week and extend through mid-November, “looks quite impressive” and should push national heating degree days to “much greater than normal” levels.

The coming cold pattern should produce the first withdrawal of the season and widen the year-on-five-year deficit later this month when it’s reflected in the Energy Information Administration’s (EIA) weekly storage report, the firm said.

“Cold is favored to gradually lose its grip Nov. 17-20, although we must expect changes out that far since we see ways cold is slow to erode,” NatGasWeather said. “What will be of considerable interest” is the EIA data later this month, which will provide the market’s “first opportunity to see how record production and widespread sub-freezing conditions collide to impact draw size.”

Prices pulled back midday on warmer risks in the Global Forecast System guidance before further medium-range cold in the European guidance helped futures settle near the day’s highs, Bespoke Weather Services said.

“This indicates that the high is likely not yet in, and if we see the same medium-range cold signal on overnight European guidance that we saw” Monday afternoon “we would look for $3.60 to be tested,” the firm said. “However, we have shifted our sentiment back to neutral with risks becoming more mixed at these elevated price levels. Though we are looking for two very significant cold shots in the medium-range, the first one has begun to moderate on guidance as it moves into the short-range, a trend that would throw the intensity of each cold shot into question if it continues overnight” and Tuesday.

“Additionally, models are more consistent in showing a long-range pattern with a stronger Pacific jet that is able to push most of the medium-range cold out of the country and pull” gas-weighted degree days to below average levels by the end of Week 2, Bespoke said. “After the amount of model volatility we saw at the end of last week we are skeptical of this warming despite it fitting our pattern expectations; we would want to see it maintain and intensify into the medium-range for it to turn our sentiment bearish.”

The weekend swing colder came as weather models have been volatile in recent weeks, struggling to get a handle on the impact of stormy weather in the Western Pacific, noted EBW Analytics Group CEO Andy Weissman.

“Weather-driven demand has now nearly always been far stronger than normal for seven straight months,” Weissman said. “...After this weekend’s huge increase in demand, the margin of safety in a cold weather scenario is wearing thin, increasing the odds of a major further increase in pricing.”

West Texas Odd One Out as Spot Market Surges

Spot prices surged from coast-to-coast Monday as locations across nearly every region generally strengthened in line with the 27.0 cent gain in average day-ahead prices at Henry Hub.

The notable exception was constrained West Texas, where most locations fell by double digits amid reports of pipeline deliverability issues impacting the region. Waha fell 25.0 cents to average $1.03 cents.

As it did late last week, Northern Natural Gas continued to report “major underperformance” at several delivery points in the Permian Basin. The operator had a system underrun limitation in effect for Tuesday’s gas day for delivery points south of the Beaver Compressor Station in Oklahoma.

“Northern has limited operational flexibility due to high line pack and capacity constraints to accommodate underperformance at these delivery points,” the operator said.

But for the rest of the physical market, it was beginning to look a lot like winter Monday. Gains were particularly pronounced across portions of the western two thirds of the country, expected to be impacted first by the upcoming cold pattern. Chicago Citygate climbed 44.0 cents to $3.560, while Northern Natural Ventura added 43.0 cents to $3.515.

“Several weather systems will track across the northern U.S. early this week with rain and snow, although with the coolest air confined to the lower demand regions of the Rockies and northern Plains,” NatGasWeather said Monday. “It will be quite warm over the West, South and East the next few days with highs mainly in the 60s to 80s and the reason for lighter than normal national demand.

“It’s during the second half of the week when the major pattern change gets underway as a strong cold blast advances into the central U.S. and then spreads out across the Great Lakes and east-central U.S. including portions of Texas and the South,” the forecaster said. “With lows behind the cold front dropping into the teens to 30s, locally single digits, national demand will rapidly increase. It will take some time for the cool front to push through the East, and not until this weekend.”

Western Canada was already starting to see colder-than-normal temperatures settle in Monday, with chilly temperatures expected to descend later this week into the Upper Midwest and into major demand centers in the East, Genscape Inc. senior natural gas analyst Rick Margolin said.

“December prices are being buoyed by longer-range outlooks also showing colder December temperatures than previously expected,” Margolin said. “Western Canada will be the first to experience the cold. Daily high temperatures for Calgary this week are forecast to remain below freezing through Thursday, coming in about 10 degrees below normal for this time of year. Such temps should sustain Alberta demand above 6.1 Bcf/d.

“That mark was achieved at about this same time last November, although under notably colder temperatures (daytime highs in the teens),” Margolin said. “Cresting the 6.1 Bcf/d mark this year under warmer temps is a product of the ongoing structural demand growth trend seen in the province for the past five years from fuel switching in the power sector, oilsands development and population growth.”

NOVA/AECO C rallied C$1.575 to average C$2.600/GJ Monday. By contrast, Westcoast Station 2, where prices have been impacted by last month’s rupture on Enbridge Inc.’s Westcoast Transmission line, traded in the negatives, averaging negative C48.0 cents/GJ.

Meanwhile, in Appalachia multiple maintenance events on Columbia Gas (TCO) are expected to impact flows in the region this week, according to Genscape analyst Vanessa Witte.

“TCO will be shutting in supply at the Smithfield-Mobley and Pickenpaw receipt locations due to modernization maintenance work on Line 1983 in northern West Virginia” from Tuesday through Sunday (Nov. 6-11), Witte said.

Smithfield-Mobley receives supplies from a MarkWest processing plant and has averaged 46 MMcf/d over the past 30 days. Pickenpaw interconnects with EQT and has averaged 55 MMcf/d over the past 30 days, meaning the maintenance could restrict around 100 MMcf/d of southbound flows on Line 1983, according to the analyst.

In addition, maintenance work at the Summerfield Compressor Station in Noble County, OH, could restrict about 50 MMcf/d of westbound flows starting Monday and continuing through Friday (Nov. 5-9), Witte said.

Columbia Gas gained 33.0 cents to $3.290.

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