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Warmer Outlook for Late March Drives Natural Gas Futures Sell-Off; Cash Declines

Warm trends in the long-range outlook Monday proved a letdown for a natural gas futures bulls, further easing any lingering concerns over lean end-of-season stockpiles. In the spot market, some spring-like temperatures in the forecast this week inspired declines for much of the Lower 48; the NGI Spot Gas National Avg. stumbled 11.0 cents to $2.740/MMBtu.

A notable warm shift in the 15-day forecast over the weekend had natural gas futures trading sharply lower early Monday. The April contract was down 8.3 cents to $2.782/MMBtu shortly after 8:30 a.m. ET. From that point on, the front month never went much higher than $2.800 on the way to settling at $2.772, down 9.3 cents. May settled at $2.785, down 8.5 cents.

The front month “opened a couple cents lower after the weekend break on slightly milder trending weather forecasts,” noted NatGasWeather, adding that “losses accelerated” after overnight data heading into Monday’s trading advertised additional milder trends.

The midday data Monday continued to trend milder for cold blasts expected this weekend and next week, the forecaster said.

“But where the pattern is most bearish is March 22-26 as a warm ridge expands to dominate most of the country, easing demand to near or lighter than normal,” NatGasWeather said. “It’s not warm enough to considerably improve deficits” given that five-year average withdrawals for the time of year are relatively light. “With deficits still set to increase to 600 Bcf, the background state is bullish, but...markets have been much more sensitive to mild trends than colder ones.”

The latest warm shift in the forecast means the potential for significant winter cold before the end of the withdrawal season is “effectively at an end,” which is likely to push futures prices lower this week with “little upside risk remaining,” according to EBW Analytics Group CEO Andy Weissman.

“At this point in the storage cycle, the main question facing the market is the potential strength of demand in the Gulf of Mexico this summer, which is expected to increase significantly compared to last year” on a combination of new liquefied natural gas export capacity and continued increases in exports to Mexico, Weissman said.

“The July natural gas contract has been showing significant strength recently, selling at a rising premium. If this strength continues, it could reduce the decline in the April contract, which closed just 9.2 cents below the July contract last Friday.”

Citing Commodity Futures Trading Commission data for positions held as of March 5, analysts with Drillinginfo said the managed money long sector increased positions for natural gas by 18,037 contracts versus the previous week, while short positions declined by 18,202 contracts.

“The speculative long sector re-entering the market and supporting prices leads to a potential conclusion that trade did form a double bottom formation, with the rebound off the lows established on Feb. 7 ($2.549) and then with a retest and failure on Feb. 15 ($2.543),” according to Drillinginfo. “Both declines represent tests of the lows that have held price declines since 2016.

“Whether the trade in March retests those lows from February remains to be seen. However, witnessing the short sector covering positions established in late January and February leads to the conclusion that the lows established in February...will hold declines near-term.”

Cash Weaker on Rising Temps

With mild conditions expected to temper demand this week, physical prices mostly trended lower Monday. An 11.0 cent decline at benchmark Henry Hub set the tone for 10-25 cent discounts at locations throughout the Gulf Coast, Midcontinent and Midwest.

NatGasWeather was calling for a brief cold shot to “race across the Great Lakes and Northeast” Monday, dropping lows into the teens to 30s for a “minor bump in demand.” After that, temperatures should warm rapidly, including highs in the 50s to 60s from Chicago to New York City.

“The southern U.S. and along the Mid-Atlantic coast will be warm this week, with highs of 60s to 80s for very light demand,” NatGasWeather said. “The West remains cool and unsettled as weather systems bring rain and snow. Much colder weather systems will arrive east of the Rockies” by the weekend , including lows in single digits to 30s for stronger demand.

Prices in the Northeast were mixed. Algonquin Citygate added 33.0 cents to average $3.600, while Iroquois, Waddington fell 12.5 cents to $2.890. Elsewhere in the East, most Appalachian points fell by around a dime, while in the Southeast, Transco Zone 4 gave up 7.5 cents to $2.750.

In the Rockies, Northwest Sumas came down from the peaks observed during the recent cold blast, dropping $6.345 to average $3.655, in line with other regional locations. Genscape Inc. on Monday was looking for Pacific Northwest demand to average around 2 Bcf/d for the next seven days, down from a prior seven-day average of 2.67 Bcf/d.

Meanwhile, in California SoCal Citygate eased 16.5 cents to $5.055 as reports of a maintenance-related constraint on imports into the region appeared to have a minimal impact on volatility.

Maintenance starting Tuesday could impact flows across the Arizona/California border, according to Genscape analyst Joe Bernardi.

“A planned tie-in on L235 downstream of Newberry beginning Tuesday and lasting through Thursday will limit capacity to zero” for the Southern California Gas (SoCalGas) North Needles Sub-Zone, consisting of interconnects with Transwestern and Southern Trails at Needles, CA, Bernardi said. “Year-to-date, these two points have brought on an average of roughly 180 MMcf/d, entirely from Transwestern. When this sub-zone was limited to zero flow during planned maintenance last November, most of the lost volumes were made up via reroutes on Transwestern.

“Instead of receiving Transwestern gas at the Needles interconnect, SoCalGas instead switched to receiving gas at Topock,” the analyst said. “It also slightly increased its receipts from El Paso at Topock. Both the Topock and Needles interconnects are within the larger Needles/Topock Area Zone, which is limited to a maximum firm operating capacity of 268 MMcf/d. Year-to-date, actual volumes have come in slightly higher than that limit, at an average of around 290 MMcf/d.”

Basis prices at SoCal Citygate and the Southern California border climbed gradually during the maintenance event last November. Prices spiked near the end of the event, corresponding with other factors, including a separate maintenance event on the SoCalGas system and high demand, according to Bernardi.

Further upstream in West Texas, prices partially rebounded from a steep sell-off Friday that saw the regional average slide 35.5 cents to drop below the $1 mark. The declines Friday coincided with a force majeure declaration from Natural Gas Pipeline Co. of America (NGPL) for issues requiring maintenance this week at its Compressor Station 102 in the pipeline’s Midcontinent Zone. This work potentially impacts outflows from the Permian Basin, Genscape told clients last week.

On Saturday NGPL declared a separate force majeure related to horsepower issues that temporarily restricted throughput at its Compressor Station 168 in Bailey County, TX, in the pipeline’s Permian Zone. That force majeure was lifted in time for Monday’s gas day, according to NGPL’s electronic bulletin board.

Waha picked up 18.5 cents Monday to average 91.5 cents, while El Paso Permian averaged $1.110, up 13.0 cents on the day.

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