A new year brought a new outlook for natural gas markets Wednesday, with a mild forecast for the first half of January bringing a return to sub-$3 prices as the storage concerns that drove up risk premiums earlier in the heating season appear largely assuaged. Influenced by sagging futures, spot markets struggled through a post-New Year’s hangover, though a few locations in the West gained ahead of cold temperatures and precipitation expected this weekend; the NGI Spot Gas National Avg. tumbled 26.5 cents to $2.915/MMBtu.
February natural gas futures settled 1.8 cents higher at $2.958 Wednesday, while the March contract slid 2.2 cents to $2.829. The relatively modest prompt month trading range -- from a low of $2.905 to a high of $3.039 -- stood in sharp contrast to the volatility of recent weeks.
A much bigger shift occurred during Monday’s session, when February settled at $2.940, down 36.3 cents after gapping lower over the weekend.
Despite tighter balances at current lower prices, the market will likely need to see an increased threat of long-range cold in order to hold support at $2.92, according to Bespoke Weather Services.
“Power burns are finally tightening with cash prices under $3 and with the holidays now behind us, and a brief cold shot helped that as well,” Bespoke told clients following Wednesday’s settle. “Production is sitting decently off highs to start the new year as well, though a dip in exports and tick higher in imports is keeping the market from appearing any tighter.”
Bespoke said it does eventually see greater cold risks arriving in forecasts, with both American and European guidance trending towards a negative Eastern Pacific Oscillation late Week 2 into Week 3 that could increase cold for the Midwest and “eventually the East.”
EBW Analytics Group CEO Andy Weissman said the market’s demand expectations had been dropping at a “ferocious rate” heading into Wednesday’s trading. This included a net loss of over 150 Bcf over the prior two weeks as forecasts calling for a return to much colder weather in January look like a “complete bust.”
“This radical shift will sharply reduce the storage deficit,” Weissman said. “While a rebound is still possible if cold weather returns, risks of severe price spikes have been largely eliminated. The rebuild of storage lays the groundwork for much lower gas prices through most of 2019.”
The circumstances of the current storage deficit -- one that developed despite an “astonishing” 10 Bcf/d production increase in 2018 -- point to a “fundamental shift” in the natural gas demand curve, according to RBN Energy LLC President Rusty Braziel. In a New Year’s Day blog post, Braziel shared some of his firm’s predictions for energy markets in 2019, including more volatility for increasingly weather-sensitive gas prices.
The demand that kept injections low all summer despite higher production was “not just any ol’ demand from exports plus weather,” Braziel said. “All summer long, injections normalized for exports and weather lagged the five-year average. Clearly something else is going on -- mostly gas-fired power generation. We are burning more gas than the degree-day based models would predict, even if you adjust for the shutdown of coal plants and the impact of new gas-fired plants coming line.
“Our thesis is that the wild card is renewables,” he said. “The more renewables in the power dispatch stack, the more the system relies on gas-fired plants that can start up quickly when the sun does not shine and the wind does not blow. But a lot of these quick-start peakers are less efficient than combined-cycle units, so more renewables means more gas demand, not less. Will this trend continue to surprise to the upside? Pretty good chance. And that will make gas prices that much more sensitive to shifts in the weather.”
Meanwhile, with a slate of new liquefaction projects slated to come online, 2019 is set up to be a big year for liquefied natural gas (LNG) exports. Between the Cameron, Elba Island, Freeport and Corpus Christi LNG start-ups, along with Sabine Pass Train 5, “LNG export capacity will be up another 3.7 Bcf/d, with 60% of that total from Corpus and Freeport on the Texas Gulf Coast,” Braziel said.
This could present problems given the new export capacity will likely come online before Kinder Morgan’s Gulf Coast Express project comes online to transport additional supply out of the constrained Permian Basin.
“The implication is that we’ll hear a giant sucking sound from LNG exports (and growing exports to Mexico as well) before Permian gas supply can get to the coast to meet that demand,” Braziel said. “In the interim, expect Gulf Coast gas prices to increase relative to Henry Hub -- and especially relative to the Permian.”
Post-New Year’s Slump
The sell-off in futures over the New Year’s holiday helped set the stage for steep spot price declines across most of the country Wednesday as physical traders returned from the extended weekend. A 43.5 cent drop at benchmark Henry Hub coincided with similar declines throughout much of the Lower 48.
The declines came even as forecasts called for a cold front to sweep across the Great Lakes and Northeast, dropping temperatures into the teens and 20s by Wednesday night for slightly stronger than normal demand, according to NatGasWeather.
“A more intimidating cold blast covers the western U.S. and Plains with lows of zero to teens, including teens and 20s over North Texas, where some snowfall is possible on the back side of a weather system that will track through Texas and the South” Wednesday and Thursday with “widespread rains into the warmer air,” the forecaster said.
But above normal temperatures were expected to “quickly spread back across a majority of the country” Friday and into the weekend. The northern regions could see highs in the 40s and 50s, while further south highs were expected to climb into the 60s and 70s -- potentially into the 80s in some places, NatGasWeather said.
In the Midwest, Chicago Citygate shed 43.5 cents to $2.640, while in the Northeast, Transco Zone 6 NY dropped 43.5 cents to $2.715. Further upstream in Appalachia, Columbia Gas was off 38.0 cents to $2.555.
Columbia Gas Transmission LLC is still awaiting an answer from FERC on its Dec. 12 request to place its 170-mile Mountaineer XPress Project in West Virginia into service, and Genscape Inc. analyst Colette Breshears said it expects the operator to promptly add 700 MMcf/d of incremental volumes once it receives regulatory approval.
“Authorization from FERC may be contingent on Columbia Gas construction reports or similar paperwork stating completion or near-completion of winter restoration efforts along the requested pathway,” Breshears told clients Wednesday. “Since many of the key items have already been submitted, it is possible authorization may be issued later this week, though with chance of delay into next week.
“Once authorization is given, Genscape expects Columbia Gas to make the facilities ready for flow of 700 MMcf/d within one to two days,” the analyst said. “Mountaineer XPress also has an outstanding request for remaining units at the new Sherwood Compressor Station, which will allow another 100 MMcf/d to flow after Jan. 15. Genscape does not anticipate this request being authorized in conjunction with the initial in-service request.”
Meanwhile, ahead of the expected arrival of cold temperatures and precipitation over the West Coast this weekend, a number of points in the the Rockies, California and Arizona/Nevada bucked the broader downtrend. Kern River climbed 15.0 cents to $3.810, while Malin and PG&E Citygate posted only modest declines to trade well ahead of Henry Hub at $3.710 and $3.815, respectively.
A Pacific storm system is expected to hit the West Coast this weekend, lifting heating demand and increasing snowpack levels, a development that could have implications for hydroelectric generation output potential this summer, according to Genscape.
“The winter’s first train of Pacific storms is poised to start hitting the West Coast this weekend,” Genscape senior natural gas analyst Rick Margolin said. “The swell of moisture will be accompanied by relatively cold temperatures. This should trigger a rise in heating demand in the Pacific Northwest and Northern California/PG&E markets, though the weekend effect coupled with expected increases in renewable output will cut into the heating loads given much of it is served with electric instead of gas forced-air as in more perpetually colder climes.”
Meanwhile, the colder temperatures arriving with the upcoming “burst of moisture” from these storms should boost snowpack.
“California snowpack is in surprisingly decent shape for this time of year, with the Northern Sierras at 67% of normal and the Central and Southern Sierras at 75% of normal,” Margolin said. “Last year at this same time these areas were sitting at just 25-33% of normal. Washington and British Columbia snowpack levels are at or near” seasonal norms.
Also in the West, the volatile SoCal Citygate tacked on $1.135 to average $7.650.
Southern California Gas (SoCalGas) notified shippers Tuesday of a “system-wide voluntary curtailment” for electric generation that would be in effect for the morning and evening hours Wednesday. The utility cited “ongoing cold weather conditions and high customer demand for natural gas.”
SoCalGas said the curtailment, coordinated with the California Independent System Operator and Los Angeles Department of Water & Power, was designed to “limit and/or reduce electric generation demand on our system, to the extent it does not impact electric system integrity.”
Operating under ongoing constraints due to limited pipeline imports and regulatory restrictions on the Aliso Canyon storage field, SoCalGas said it was continuing to ask customers to conserve natural gas where possible given recent forecasts. In late December, the utility unveiled a winter demand response program through a partnership with participating smart thermostat manufacturers.