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Natural Gas Futures Rebound as Markets Brace for Bone-Chilling Polar Vortex Cold

With extreme polar vortex cold set to arrive next week and guidance advertising cooler trends into early February, natural gas futures rebounded Thursday from a sharp sell-off earlier in the week.

In the spot market, a cold front headed for New England prompted Northeast price spikes as West Texas locations gained amid reports of weather-related supply underperformance in the Permian Basin; the NGI Spot Gas National Avg. added 44.0 cents to $3.580/MMBtu.

February Nymex futures settled 11.9 cents higher at $3.099 Thursday, trending higher through the day after gaining overnight. That’s in contrast to Wednesday’s session, when early gains failed to stick as prices ultimately settled lower on the day. Further along the strip, March settled 7.6 cents higher at $2.998 Thursday, while April added 5.4 cents to settle at $2.844.

The latest guidance Thursday continued to show a “dangerously cold polar blast” hitting the Lower 48 starting early next week and continuing through Feb. 2, according to NatGasWeather. The forecaster attributed Thursday’s rally to a combination of markets pricing in next week’s extreme cold and Global Forecast System data trending colder for the northern United States Feb. 4-8, adding nearly 20 heating degree days to the outlook compared to Wednesday’s runs.

“The pattern would be exceptionally bullish if not for the weather data favoring the polar cold pool retreating back into southern Canada Feb. 5-8,” NatGasWeather said. However, recent model runs “show ways cold can sneakily push back across the border, as we cautioned could easily happen.”

The forecast warm-up in the first week of February that drove selling earlier in the week has since added back cold and raised heating demand expectations, and guidance has raised doubts about “how much warming will actually occur Feb. 4-10, although the data still says it should be at least a modest warm-up,” according to the forecaster.

Meanwhile, the Energy Information Administration (EIA) on Thursday reported a slightly larger-than-expected 163 Bcf withdrawal from U.S. natural gas stocks, prompting an initially modest reaction from a futures market focused on the impact of upcoming polar vortex-influenced cold.

The 163 Bcf withdrawal, recorded for the week ended Jan. 18, falls on the bullish side of major surveys but is bearish versus the five-year average 185 Bcf pull and the 273 Bcf withdrawal EIA recorded in the year-ago period

The figure didn’t provoke a pronounced reaction from the futures market, at least not right away. Prior to the report, February Nymex futures had been trading in a range from around $3.060-3.110. As EIA’s report hit trading screens at 10:30 a.m. ET, the front month traded as high as $3.120 and as low as $3.075 before hovering around $3.075-$3.095 for the next 10 minutes or so, in line with the pre-report trade. A little under an hour later, however, futures rallied to as high as $3.155.

Estimates prior to the report had pointed to a withdrawal slightly smaller than the actual figure. A Bloomberg survey had showed a median expectation for a 155 Bcf pull, while a Reuters survey had showed an average 154 Bcf withdrawal. Intercontinental Exchange EIA Financial Weekly Index futures settled Wednesday at a withdrawal of 160 Bcf.

Bespoke Weather Services viewed the 163 Bcf pull as slightly bullish.

“February gas prices are not particularly impressed with this number, but with cold weather only confined to the East on the week and a large draw both in the Midwest and in the South Central we see this print as indicating significant upside risk on any return of colder weather into the middle of February,” Bespoke Weather Services said.

“With a colder February our end-of-draw expectations have dipped below 1.2 Tcf and can fall further if forecasts cool more than expected; we of course need cold risks on model guidance to rally, but we expect those to build over the coming week and support prices.”

Total Lower 48 working gas in underground storage stood at 2,370 Bcf, 305 Bcf (11.4%) below the five-year average but 33 Bcf (1.4%) higher than last year’s stocks, according to EIA.

By region, the largest withdrawal occurred in the Midwest at 56 Bcf, while 54 Bcf was pulled in the East. The Pacific region withdrew 11 Bcf for the week, while 6 Bcf was pulled from Mountain region stocks. The South Central saw a net 38 Bcf withdrawal, including 29 Bcf from nonsalt and 8 Bcf from salt stocks, according to EIA.

Thanks to the polar vortex dropping southward, the Lower 48 can expect some truly bone-chilling, potentially record-setting and possibly even life-threatening cold next week, according to forecasters.

The Midwest could see the coldest weather in over a decade, potentially colder than even the 2014 polar vortex event, according to Radiant Solutions. The forecaster said an Arctic air mass is expected to settle into the region and break daily temperature records, with potentially life-threatening wind-chill levels.

Forecasts as of Thursday showed lows in Chicago dropping to negative 18 degrees on Jan. 31, which would be the coldest temperatures there since 2009, Radiant said. The forecast high of negative 5 degrees on Jan. 30 would be the coldest daily high temperature since 1996. Other cities across the Plains and Midwest could see lows in the negative 20s and 30s, with wind chill potentially in the negative 50s in Minnesota.

“The upcoming chill is expected to reach or exceed levels from the 2014 polar vortex intrusion in much of the Midwest,” Radiant’s Steve Silver, senior meteorologist, said. “We expect the cold to set records in the Upper Midwest, and some models suggest that there still may be room for the forecast to trend additionally colder.”

Temperatures aren’t expected to be as intense in the East during this period but should still drop to very cold levels, including lows in the single digits from Boston to New York City and lows in the teens as far south as Atlanta, according to Radiant.

New England, West Texas Surge

While temperatures next week could break records, conditions over the next few days are looking plenty cold in the Midwest, where spot prices strengthened Thursday. Joliet climbed 16.0 cents to $3.195, while Emerson averaged $3.100, up 3.5 cents.

“Over the northern Plains and upper Midwest, the next surge of Arctic air from central Canada has arrived,” the National Weather Service (NWS) said Thursday. “A clipper low pressure system developing along an Arctic front is bringing a brief period of snow squalls across the Great Lakes. The snow is expected to linger into Friday over the lake-effect snow belts.

“Arctic air is forecast to remain over the upper Midwest into the weekend, where temperatures of more than 20 degrees below normal, as well as dangerous wind chills between minus 10 and minus 30 can be expected.”

Prices surged throughout the Northeast as a cold front was expected to move in following mild conditions in the East Thursday. In New England, Algonquin Citygate spiked $5.060 to $8.585, while further south Transco Zone 6 NY jumped $1.520 to $4.495.

“A stream of mild air from the south has quickly brought above normal temperatures up the East Coast and into New England ahead of an active cold front,” the NWS said. A “wide swath” of rain was expected to move out of the Mid-Atlantic and Northeast Thursday night. “Cold air behind the front is expected to change the rain to a period of snow as it spreads up the spine of the Appalachians and across interior New England overnight.”

Meanwhile, West Texas prices gained sharply for a third straight trading day Thursday as El Paso Natural Gas Co. (EPNG) issued an operational flow order (OFO) due supply underperformance in the Permian impacting system pressure. EPNG warned shippers of strained operating conditions on Wednesday, citing “unseasonably cold overnight temperatures” that caused the supply underperformance, leading to lower-than-expected linepack.

EPNG followed up with an OFO Thursday due to the weather-related supply issues. The operator said the Washington Ranch storage facility was operating on maximum operational withdrawal.

El Paso Permian jumped 44.5 cents to $2.720 Thursday, while Waha surged 53.5 cents to $2.675.

Elsewhere, in Canada, NOVA/AECO C slipped C3.0 cents to average C$1.870/GJ Thursday.

AECO basis in January has been modestly stronger compared to the year-ago period, helped by a combination of steady demand growth and a drop-off in production in the Alberta province, according to Genscape Inc. senior natural gas analyst Rick Margolin.

Using NGI price data, Margolin calculated that spot basis at the hub has averaged minus US$1.69/MMBtu month-to-date, about 45 cents stronger compared to last year.

“Part of last year’s weakness was a product of AECO failing to keep pace with the New Year’s Day rally at Henry Hub. But this year has also benefited from higher provincial demand and lower production,” Margolin said. “So far this month the province is consuming an average 6.31 Bcf/d. This is a record for January and perpetuates” a 12-year growth trend for January demand.

This comes despite temperatures in the province averaging about 3 degrees warmer than normal so far this month, according to the analyst. On a weather-adjusted basis, demand has averaged 0.24 Bcf/d higher compared to January 2018.

“Structural growth in Alberta demand is evident in every month and season of the calendar year due to ongoing growth of the oilsands sector, population growth and fuel switching in the power sector,” Margolin said. “Production is also coming in lower. Month-to-date volumes are averaging 12.26 Bcf/d, about 20 MMcf/d below the same time in 2018.

“Current Alberta production volumes are recovering from earlier-month freeze-offs, though -- as anticipated -- recovery has been somewhat slow as another cold front moved through the province at the end of last week. Current production is coming in just under 12.5 Bcf/d, which is about 0.2 Bcf/d below the 30-day average prior to the current round of freeze-offs starting around Jan. 7.”

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