- Colder-trending American weather model boost natural gas futures, but European model turns milder
- Market still comfortable in storage outlook, even with colder February
- Spot gas slips as mostly mild weather on tap before weekend cold blast
- Permian Basin flows to resume following pipeline repairs
After a brief dip into negative territory, natural gas futures posted another gain Tuesday as the American weather model turned more aggressive, with cold returning to the East later this month. With already strong demand on tap beginning this week and lasting through next week, the Nymex March gas futures contract settled 4.6 cents higher at $2.688. April was up 4.6 cents to $2.705.
Spot gas prices were generally lower, however, as mostly mild weather was forecast ahead of this weekend’s projected blast, save for a storm system that on Wednesday is likely to move across the country’s midsection and into the East. Western pricing hubs continued to retreat from recent highs, while Northeast points posted dramatic losses of more than $1. The NGI Spot Gas National Avg. fell 27.5 cents to $3.135.
With the days of winter winding down, all eyes have been on weather and the impact any additional cold could have on storage supplies. Most market observers appear to be comfortable with deficits still sitting more than 400 Bcf below the five-year average, and prices have struggled to gain much ground. After surging as much as 16 cents higher during Monday’s session, the prompt month went on to settle only about 6 cents higher than Friday.
“This weakness is not surprising,” EBW Analytics CEO Andy Weissman said. “While Monday’s weather forecast increased projected demand in Weeks 2 and 3 by more than 70 Bcf, it still leaves projected end-of-March storage at a comfortable level -- especially given the structural oversupply condition expected to occur during the first few months of the injection season.”
The overnight weather models were mixed heading into Tuesday’s session, with the Global Forecast System (GFS) little changed but with the European model losing numerous heating degree days, according to NatGasWeather. The early morning GFS trended colder, however, and then did so again on the latest midday data, adding 16 HDDs compared to Monday night’s run. It sat nearly 25 HDDs colder over the 15-day forecast compared to the European model.
“The main difference is the GFS is colder by favoring a weaker and shorter break over the East around Feb. 23, and is also more aggressive with cold returning across the East Feb. 24-27,” NatGasWeather said.
The latest run of the European weather model was even milder, especially for Feb. 23-27, as it sees a stronger/milder ridge over the East. “One of these models is wrong, and the overnight data will be watched closely to see which one gives in to the other,” NatGasWeather said.
The chillier outlook -- although still uncertain -- was enough to bump up the March contract another penny or so in the last hour of trading, although the milder European model run trimmed those gains to only about 2 cents at presstime.
Meanwhile, this week’s storage report is expected to come in sharply lower than last week’s, with Energy Aspects pegging the pull at about one-third of last week’s reported 237 Bcf draw.
“That pendulum is clearly weighing on market sentiment as the return to an 80 Bcf withdrawal signals to some that winter is effectively over, although our balances are pointing to an end-March inventory position just below 1.1 Tcf,” Energy Aspects analysts said.
Cold set to return in the next few days is expected to produce a spate of 150-200 Bcf withdrawals to round out the month, however. Although Henry Hub cash prices are near their lowest levels of the winter, “it might only take one bout of sustained cold to push the heating season’s carryout below 1 Tcf. Winter is not quite over yet,” analysts said.
While that may be true, the front of the Nymex curve had shifted to reflect the market’s understanding that a “stock-out” situation is no longer possible following extreme warmth from mid-December to mid-January, according to Mobius Risk Group. “While a move below 1 Tcf at the end of March is not statistically impossible, it is not a high-probability outcome.”
When considering the market’s expectation that the summer injection will be greater than 2.4 Tcf, this has left bears in control of the market, according to Mobius. A similar balance of power could persist until the second half of the year when price-challenged production and increasing liquefied natural gas (LNG) exports will combine to question whether 2 Tcf winter withdrawals and 2.5 Tcf summer injections should be assumed in perpetuity, the firm said.
As for prices, EBW said it will be interesting to see how the projected oversupply situation will play out in the futures curve. Despite testing support multiple times, the Nymex front-month contract has not traded below $2.50 since July 2016 -- a run of more than 30 months.
The March contract closed at $2.55 on Feb. 7, but it then rebounded fairly sharply from both technical support and constructive near-term weather forecast shifts, according to EBW. As the gas market grapples with structural oversupply and weather-driven demand fades, it's likely the front-month contract will again come under sustained downward pressure.
“That will likely make $2.50 a site of intense technical back-and-forth in the months ahead. If support breaks, the front-month contract could see sharply lower prices,” Weissman said.
Spot Gas Slides Ahead Of Blast
Spot gas prices were overwhelmingly lower aside from markets in West Texas, which put up gains of 60-70 cents as previously restricted flows out of the Permian Basin were expected to resume beginning Wednesday.
The force majeure that began Feb. 6 on El Paso Natural Gas Pipeline, which cut about 180 MMcf/d of flows through Cornudas’ High Pressure line, ended this weekend, according to Genscape Inc. Cornudas flows remain depressed, however, because of an additional ongoing maintenance. The smart pig run on Line 2000 is cutting about 330 MMcf/d of westbound Permian molecules headed for Cornudas. Originally scheduled to begin early last week, the work was postponed until this past weekend.
“It was initially expected to last through Monday’s gas day, with operating capacity returning to normal on Tuesday, but El Paso announced yesterday that it was extending the end date by one day,” Genscape natural gas analyst Joe Bernardi said.
As such, El Paso-Permian next-day gas shot up 52 cents to $2.035.
In the West, which was especially volatile after frigid air moved into the region last week, prices continued to come off recent highs. Still, Bernardi cautioned that Northwest Sumas prices could remain volatile this week with sustained high demand and supply issues.
“Sumas stood out from the other western hubs during Monday’s trading. While most other hubs fell back to Earth, Sumas fell about $6 but still finished above $40, which is its third-highest basis price on record, according to NGI,” Bernardi said.
Northwest Sumas gas for Wednesday flow plunged $17.40 to $25.53.
The comparable strength comes as Northwest Pipeline is experiencing an unplanned compression issue that began this past weekend, limiting withdrawal capacity from the Jackson Prairie storage facility to 485 MMcf/d. In the previous five winters, only about 8% of days posted withdrawals in excess of the 485 MMcf/d mark, according to Genscape.
This winter to date has remained true to that form, withdrawing more than that only 8% of the time. Most of this winter’s withdrawal-heavy days have come in the last week, however. Pacific Northwest demand has been posting its highest marks for February since 2014, and Genscape meteorologists are forecasting colder-than-normal weather to remain in place there for the next two weeks.
Furthermore, the wintry conditions have resulted in additional freeze-offs in the Rockies. While Lower 48 production estimates for Monday topped 85 Bcf/d, analysts estimate freeze-offs have ramped back up to nearly 0.6 Bcf/d.
Elsewhere in the West, California demand and prices also have fallen but still remain elevated. Pacific Gas & Electric total demand is still more than 1 Bcf/d above the five-year average for this date but has eased by several 100 MMcf/d compared to last week, according to Genscape.
Despite sharp declines on both Monday and Tuesday, PG&E Citygate prices at $6.145 still represent a $3.475 premium to Henry Hub.
SoCal Citygate has seen a similar story as spot gas fell $2.815 to $6.24, a $3.57 premium over Henry.
The higher prices in California come as Southern California Gas (SoCalGas) announced on Sunday that it withdrew more than 3.1 Bcf from Aliso Canyon from Feb. 4-9. Its total storage inventory, including the three non-Aliso storage fields, dropped by roughly 5.1 Bcf during that same time, meaning that Aliso accounted for slightly more than 60% of those withdrawals, according to Genscape.
“SoCalGas’ system-wide voluntary curtailment of electric generation remained in effect on Tuesday, so the potential for more withdrawals from Aliso remains,” Bernardi said. Genscape forecasters, however, are expecting a gradual warming, with the area returning to seasonally average temperatures by Thursday.
Meanwhile, the timeline has been extended for the ongoing investigation by the California Public Utility Commission (CPUC) into the feasibility of reducing or eliminating the use of Aliso Canyon. The investigation began in early February 2017, and proceedings of this type normally require a resolution within 18 months.
The CPUC, however, recognized from the outset that the question of Aliso’s future would present “many complex issues” and as a result adopted a 24-month timeline as an exception to the norm. The investigation hit the 24-month mark last Saturday, when the CPUC officially announced that the new deadline would be August 8, 2020 -- an additional 18 months.
In the country’s midsection, prices in the Midwest slipped a few cents at best at most pricing hubs, while Midcontinent prices were down more than a dime at some locations.
Most Southeast points fell a few pennies, while Henry Hub dropped 4.5 cents to $2.67.
Meanwhile, Genscape reported that evening cycle scheduled deliveries to Corpus Christi LNG posted at 150 MMcf/d for Monday’s gas day, signaling that liquefaction operations at the recently commissioned Train 1 at the South Texas facility will likely resume soon. Liquefaction operations at Corpus Christi Train 1 stopped in mid-January from an unannounced outage.
“Deliveries to the facility initially resumed last week. Scheduled nominations averaged 73 MMcfd over the last five days, suggesting testing activities prior to a return to service,” Genscape analyst Allison Hurley said.
On the East Coast, next-day gas took a tumble as mild weather was expected to quickly return after a brief weather system was forecast to bring rain, snow and ice to the region through Wednesday. Algonquin Citygate plunged $1.55 to $3.405, and Tennessee Zone 5 200L dropped 38 cents to $3.14.