A shift colder in forecasts Tuesday helped natural gas futures bulls build on Monday’s rally, although with the start of injections, imminent upward momentum appeared limited as the market awaited a better reading on balances. In the spot market, West Texas posted another round of heavy losses as the region continues to struggle with pipeline constraints; the NGI Spot Gas National Avg. fell 1.5 cents to $2.610/MMBtu.
Following a 5.5 cent rally Monday, the April Nymex futures contract added another 2.4 cents Tuesday to settle at $2.874 after going as high as $2.897. The May contract settled at $2.872, up 1.6 cents, while June settled 1.0 cent higher at $2.915.
The midday weather data Tuesday furthered colder trends that had showed up overnight, with the Global Forecast System adding an “impressive” 36 heating degree days compared to data issued 24 hours earlier, according to NatGasWeather.
“Colder trends were most notable with a weather system impacting a much greater portion of the eastern U.S. next week and also March 29-31, where numerous weather systems will impact the U.S., including again over the East,” the forecaster said. “It’s still a very spring-like pattern due to a mix of strong spring weather systems that will bring heavy showers and powerful thunderstorms, but also with mild to warm breaks in between. It’s just the most recent data sees a little colder air with the systems,” while also showing a greater impact over the eastern United States.
Given the extent of the increase in anticipated heating demand based on the latest model runs, NatGasWeather said it “has to be somewhat concerning for bulls” that the April contract only managed to gain a couple pennies Tuesday.
Meanwhile, Energy Aspects late last week revised its end-of-season inventory estimate back up to 1.08 Tcf versus an estimated 950 Tcf the week before.
“With the shoulder season approaching fast and a repeat of the supportive cold in April 2018 and early heat in May 2018 unlikely this year, the focus is squarely on the injection season,” analysts with the consulting firm said in a recent note to clients. “How tight or loose fundamentals are in the shoulder season will set the tone for near-term trading. If storage is at 1.08 Tcf at end-March, there is little need for burning off excess inventories early in the injection season and consequently no major risk that April 2019 cash decouples from the strip.
“Instead, the movements in balances and prices in the shoulder season should stem from a trade-off between supply recovery (and growth) and structural demand” as weather becomes less of a factor, Energy Aspects said. “...In short, price formation will depend on how hefty injection rates are at the start of the shoulder season. Currently, our weekly balances point to a 6.5 Bcf/d average monthly injection rate in April.”
The firm said a further ramp-up in liquefied natural gas (LNG) feed gas demand during the shoulder months is unlikely.
“Our expectations are for structural demand to carry on as it has recently,” Energy Aspects said. “A rise in LNG feed gas demand in the shoulder season would require another train to request permission to introduce feed gas and/or for Cameron LNG Train 1 to actually begin to bring in feed gas consistently, which it has not done so far according to flow data. For Cameron LNG to meet a stated first export by 2Q2019, feed gas intake needs to start immediately and be sustained.
“Freeport LNG Train 1 has stated that it could begin to take feed gas in April or May, but those initial volumes are likely to be minimal and will not materially sway balances as first LNG exports are not expected until July at the earliest.”
On the supply side, production could prove a “major wildcard” in terms of shoulder season balances, as output took a hit during the first quarter because of freeze-offs and operational issues.
“Some 65 Bcf in Appalachia alone was lost due to freeze-offs,” according to Energy Aspects. “How quick a recovery from freeze-offs occurs, and the degree of sequential growth beyond the recovery, will be key to how tight the market will be.”
The spot price situation worsened for West Texas producers Tuesday, as an ongoing production glut -- along with a recent force majeure impacting westbound flows out of the Permian Basin -- yielded steep discounts to Henry Hub for most of the region. NGI even recorded negative spot prices at Waha for the second straight trading day, with the location averaging just 14.5 cents Tuesday, down 16.0 cents day/day.
Individual trades at Waha have dropped into the negatives before, including earlier this year, when NGI recorded trades as cheap as negative $1.50 on Feb. 4. Before that, the West Texas location saw negative spot price trades last November, including a low of negative 25 cents recorded Nov. 27, Daily GPI historical data show.
Following an El Paso Natural Gas (EPNG) force majeure Monday at the Lordsburg and Florida compressor stations in southern New Mexico, flows through the “L2000” meter in West Texas had dropped from 568 MMcf/d to 373 MMcf/d Tuesday, according to Genscape Inc.
The EPNG restriction this week only adds to existing congestion for gas looking to exit the Permian, according to Genscape senior natural gas analyst Rick Margolin, who said there’s “little relief in sight” for negative basis differentials in the region.
On Monday Waha spot prices traded as low as negative 1.0 cent on the way to averaging just 30.5 cents, a hefty $2.555 discount to Henry Hub. On Tuesday Waha traded at an average $2.765 discount to the Hub.
The latest move was likely exacerbated by the force majeure on EPNG’s system, but “basis has been gradually weakening in the area since late February,” Margolin said. “Our production estimate has returned to above the 9 Bcf/d mark in recent days after freeze-offs or other operational issues in the basin pushed it to a 122-day low of 8.37 Bcf/d on March 13. Waha basis faces near-term headwinds with production forecast to rise with warm, dry weather resolving freeze-offs and a solid rally” for West Texas Intermediate oil prices.
“This will combine with a generally weak demand trend as spring power loads typically wane before summer cooling loads ramp, and wind power typically increases in the spring. Lastly, relief to move growing production volumes out of the Permian still remains a ways off.”
Most other regions posted small spot price adjustments Tuesday as near-term forecasts suggested temperatures for much of the Lower 48 wouldn’t stray far from seasonal averages over the next few days. Radiant’s one- to five-day outlook Tuesday called for some below-normal temperatures over parts of the Midwest, South, Southeast and Mid-Atlantic, with generally near- and slightly above-normal temperatures across the Plains, Rockies and the West.
Chilly temperatures in Texas this week, including lows in the 40s in Houston and Dallas, according to Radiant, supported higher spot prices at locations like Katy, which added 7.5 cents to average $2.935.
While forecasts weren’t showing much in the way of extreme temperatures, the National Weather Service (NWS) on Tuesday warned that “major to historic and catastrophic flooding will continue across parts of the Missouri and Mississippi River Basins due to rapid snowmelt as a result of heavy rainfall last week. A round of light rain showers moving through Tuesday evening may only exacerbate flooding across the region as well.
“Flood warnings and advisories remain in effect, mainly focused across parts of eastern Nebraska and western Iowa,” the forecaster said. “Areal flooding is also a concern across parts of the Northwest and Northern Rockies/High Plains as well, as warm temperatures lead to accelerated snowmelt and the potential for ice jams.”
“A cold front moving into California and the Southwest Wednesday and Thursday will bring increased chances for rain and mountain snows to California, the Central Great Basin and into the Southwest/Four Corners region,” the NWS said.