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Natural Gas Bulls Take Breather as Forecasts Moderate; Cash Rises Ahead of Cold Shift

After a furious rally to start the week, natural gas futures bulls took a breather Tuesday as the latest forecasts eased cold expectations somewhat. With markets zeroed in on the prospect of a shift to frigid temperatures starting this weekend, spot prices gained across most regions; the NGISpot Gas National Avg.finished 16.5 cents higher at $3.730/MMBtu.

The February Nymex futures contract settled at $3.501 Tuesday, down 9.0 cents on the day but still holding onto the lion’s share of Monday’s 49.2 cent surge. The front month went as high as $3.722 in after hours trading before more moderate forecasts overnight appeared to inspire some selling Tuesday morning. Further along the strip, the March contract settled at $3.249, down 4.0 cents.

Bespoke Weather Services attributed the selling Tuesday to overnight moderation in the European weather model that revised gas-weighted degree day (GWDD) expectations lower for the Week 2 outlook period. The firm said the drop in GWDDs was not entirely surprising given the potential that the American model had been overestimating cold risks.

“We see the tropical forcing signal for the week working against major, sustained cold and instead allowing for more transient cold across the southern tier,” Bespoke said. “Late Week 2 and especially into Week 3 that should change, however, as we see a very significant cold signal dominating for the first half of February.

“We are beginning the transition into the much colder February pattern we had been expecting, and though the transition can be a bit noisy at times, we would expect the long-range bullish pattern look on model guidance to hold and grow over the coming week.”

Winter 2018/19 is still shaping up to be a tale of two halves, with the warmer-than-normal conditions of December and early January flipping to intense polar temperatures that could drag on well into February, according to forecasters.

“Winter 2018/19 is at a crossroads at its halfway point, as an anomalously warm first half of the season gives way to an invasion of Arctic air set to commence this weekend,” Gaithersburg, MD-based forecaster Radiant Solutions said Tuesday. “Another strong storm looks to bring heavy snow to portions of the Midwest and Northeast this weekend and will be followed by an Arctic air mass that will set up shop over the eastern half of the U.S.”

Radiant’s lead forecaster Bradley Harvey said the coldest weather of the season so far could arrive next week, delivering subzero temperatures to Chicago and lows in the teens in New York City.

“This marks the beginning of a pattern supportive of a direct connection to the Arctic, importing frigid air southward into the U.S. at times through the latter third of January,” Harvey said.

Some computer models projected that part of the polar vortex would migrate south toward the Hudson Bay, presenting a risk for even colder temperatures than those currently advertised, according to Radiant. The forecaster said it’s also projecting a colder than normal February, seeing additional opportunities for Arctic air to break into the Lower 48 next month.

Meanwhile, it’s too early to gauge the extent of the potential freeze-offs that could result from the upcoming cold pattern, as forecasts suggest the more extreme frigid temps could bypass key producing regions in the Lower 48, according to Genscape Inc.

“While the demand-creation aspects of these systems are undeniably bullish, the supply-side impacts are less certain,” Genscape senior natural gas analyst Rick Margolin told clients Tuesday. “Current Global Forecast System weather models just skirt Rockies, Permian and Bakken producing areas, so predicting freeze-off impact at this point is premature.”

Forecast Teases Spot Prices Higher

Spot prices continued to strengthen across the Midwest, Gulf Coast and Texas Tuesday, with physical markets looking ahead to the forecast arrival of widespread frigid temperatures over the weekend. Benchmark Henry Hubtacked on 15.5 cents to $3.515.

“National demand will be lighter than normal through Friday as mild conditions expand to cover most of the country besides the far North, where glancing blows of subfreezing air will occur,” NatGasWeather said Tuesday. “With highs reaching the 60s and 70s over much of the southern U.S. Wednesday through Friday, demand will be quite light across the southern tier.

“The first frigid cold shot will arrive into the central, southern and eastern U.S. this weekend, where lows will drop into the negatives 20s to 20s, coldest over the Midwest and interior Northeast.”

In the Midwest and Midcontinent, Northern Natural Venturaadded 16.0 cents to $3.395, while Emersonpicked up 12.5 cents to $3.375.

The National Weather Service (NWS) was calling for a strong cold front to drop southward across the Plains into early Wednesday, “bringing frigid temperatures to the Dakotas and the Upper Midwest by the middle part of the week. There should be enough moisture with this front to produce some mixed precipitation over the lower Great Lakes and snow showers behind the front over northern Michigan.”

Spot prices also strengthened across the Rockies Tuesday. Cheyenne Hubadded 26.0 cents to average $3.345, while Northwest Sumassurged 49.0 cents to $4.340.

Production out of Western Canada has rebounded following freeze-offs last week, but full recovery of the impacted volumes could take some time, according to Genscape.

“Alberta production has returned above 12.2 Bcf/d for the first time since Jan. 6,” Genscape’s Margolin said. “A cold front moved into the province on Jan. 4, driving daytime highs below freezing for a five-day stretch” that also saw “nighttime lows into double-digit negatives.”

Indications of freeze-offs started showing up on Jan. 5, and production in the region dipped as low as 11.58 Bcf/d on Jan. 8, roughly 968 MMcf/d below the 30-day average. From Jan. 5 through Tuesday, a total of 4.9 Bcf of production has been restricted, averaging out to about 576 MMcf/d, according to Margolin.

“Though aggregate production numbers have been ticking back up, it may take a while before volumes get back to the pre-freeze-off 30-day averages around 12.6 Bcf/d,” the analyst said. Forecasts Tuesday showed “relatively mild conditions” for the southern part of TransCanada Corp.’s Nova Gas Transmission system, but “areas north of the Nova trunkline are under extreme cold warnings, with forecasts posting daytime highs in the negatives through Sunday.”

Meanwhile, an unplanned outage at the McMahon Plant that began Jan. 2 in northern British Columbia continued to impact about 0.5 Bcf/d of production Tuesday, according to Genscape analyst Joe Bernardi.

“A pipe replacement required the plant to go offline nearly two weeks ago, cutting 537 MMcf/d of production,” Bernardi said. “Repairs were expected to be completed by this past Sunday, but on Saturday the pipe posted a notice changing this repair schedule, noting that it may require an additional seven days for the repairs to finish.”

In Canada, Westcoast Station 2fell C1.5 cents to C$1.800/GJ. 

Meanwhile, in California SoCal Citygatesurged 62.5 cents to $5.510.

Expecting colder temperatures and higher customer demand, utility Southern California Gas (SoCalGas) has issued a system-wide voluntary curtailment this week for electric generators. The curtailment went into effect for Monday’s gas day (Jan. 14) and is to continue through Friday (Jan. 18). 

SoCalGas said the curtailment order is part of the protocol established for conducting withdrawals from the restricted Aliso Canyon storage facility. 

“If needed, the Aliso Canyon storage field may be used to meet the current demand as well as maintain inventory levels at the other storage fields for core reliability,” SoCalGas told shippers in a notice Monday. “In addition, with the current forecasted weather, SoCalGas is asking customers to conserve natural gas where possible.”

SoCal Citygate has been susceptible to price spikes over the last year and a half because of a number of ongoing restrictions on pipeline imports, combined with the limited availability of Aliso withdrawals in the aftermath of a 2015 leak at the facility.

SoCalGas issued a series of similar voluntary curtailment orders for electric generators earlier this year, which preceded withdrawals from Aliso.

Demand on the SoCalGas system topped 3.6 Bcf on Monday, according to the utility, which estimated that demand would hover around 3.5 Bcf/d through Thursday before easing to around 3.2 Bcf Friday.

“A very active weather pattern will be in place across California and then the Intermountain West through the middle of the work week,” according to the NWS. “A deep Pacific trough off the West Coast will remain in place over the next few days with a frontal boundary approaching central California Tuesday evening, and a much stronger storm arrives Wednesday night.

“The result will be widespread rain with enhanced rainfall for the coastal mountain ranges...Heavy snow will fall across the Sierra Nevada and Siskiyou mountains of California, with amounts exceeding a foot at the highest elevations.”

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