In an extremely quiet session for most of Tuesday, natural gas futures prices rose for a third straight day as weather outlooks began to trend warmer for the latter part of June. However, it wasn’t until midday data trended even hotter that confidence in the forecasts grew, sending the July Nymex up 4.2 cents to settle at $2.399. Gains of 4 cents or more were seen through September, although prices for those contracts remained below $2.40.
Spot gas prices were mixed but generally stronger even as a large weather system and associated cool front began sweeping across the northern and central United States, extending its reach into Texas, the South and Southeast. However, steep declines in West Texas help send the NGI Spot Gas National Avg. down 1.5 cents to $2.075.
For a market dominated by weather, extreme heat that could potentially revive natural gas prices has been nonexistent to date. Aside from a couple of brief heat spells at the end of May, weather patterns have generally resulted in fairly comfortable temperatures and prices near three-year lows.
Overnight Monday, weather models in the six- to 15-day time frame showed more upper level troughing that would reduce heat in the western United States while allowing for more heat across the southern half of the country, according to Bespoke Weather Services. “While we are not expecting an overly hot pattern, it’s possible that we still need to revise our gas-weighted degree days a bit higher in the 11- to 15-day time frame to allow for more heat in the southern half of the nation.”
Midday data continued to reflect the warmer shift, with the Global Forecast System (GFS) trending even hotter with a strong upper ridge across the southern and central United States June 23-25, according to NatGasWeather. “If the GFS model were to prove true, it might be considered hot enough to finally end bearish weather sentiment. Although, the European model would also need to come on board with it if the markets are to believe it.”
Overall, above-normal temperatures are expected to remain focused in parts of the West, but there are risks that the Northwest could be cooler than forecast based on the models, according to Radiant Solutions. Meanwhile, global wind patterns and the tropical Madden-Julian Oscillation are expected to limit warming across the eastern half of the United States, where the forecast falls into the normal category.
Even with the string of modest gains, prices remain at levels that could stimulate additional demand and discourage additional supply through year end, according to Mobius Risk Group. Obfuscating the impact of a decline from near $2.75/MMBtu to sub-$2.50 are the expectations for mostly cooler-than-normal weather through mid-June.
“However, heat intensity in the southern U.S. has materially escalated in the past week and considering price elasticity in the power stack is heavily skewed to the South, there could be changes in market sentiment before the July contract rolls off the board,” Mobius said.
As prices have fallen enough to avoid late-summer storage constraints, there is an increasingly probable trend toward year/year supply/demand tightness by the end of 1Q2020, according to the Houston-based firm.
“A look at 24-month strip pricing across numerous supply markets shows the forward 24-month strip is at levels that have historically been followed by year/year production declines,” Mobius said. “In addition, the forward West Texas Intermediate strip at sub-$55/bbl is not as likely to support a steady stream of associated gas gains.”
A closer look at recent rig count data shows support for some of the emerging trends on the supply side, with the number of active rigs in the United States as of last Friday (June 7) down 87 from a year ago, according to Baker Hughes, a GE Company.
Another supporting data point regarding supply side changes can be seen in Comstock Resources Inc.’s announced takeover of Covey Park Energy LLC, which would transfer Haynesville assets from a private, legacy producer to a public legacy participant.
Simplistically, this is a “situation where forward economics did not support drilling for the existing producer and thus the debt burden was unsustainable. This is admittedly a high-level synopsis without the privilege of detailed transactional knowledge.
“However, the Haynesville has proven to be the ‘tip of the sword’ when it comes to gas producer economics. This region has delivered remarkable growth when forward strip prices climb above $3.25 and undeniable declines when forward prices are sub-$2.75,” Mobius said.
Ongoing pipeline maintenance across the country drove spot gas prices mostly higher, but cooler weather in Texas, the South and Southeast softened demand in those regions and pushed back on gas flows from the Permian Basin.
The lack of strong demand sent prices in West Texas crashing lower after several days of meaningful increases. Waha cash plunged 55.5 cents to average 71.5 cents.
Farther east, spot gas in Louisiana was slightly higher Tuesday as Texas Eastern Transmission (Tetco) restricted southbound capacity on its Barton, AL, compressor station to 1,232 MMcf/d until June 27. Flows through Barton have averaged 1,417 MMcf/d and maxed at 1,521 MMcf/d over the last few weeks, and flows dropped below capacity to 1,158 MMcf/d, according to Genscape Inc.
“While this brings bullish pressure to Tetco’s Louisiana demand hubs, these locations have enough supply options to compensate that Texas Eastern E. LA and Texas Eastern W. LA lost a few cents” on Monday, Genscape natural gas analyst Josh Garcia said.
Tetco also began work Tuesday on its Lambertville, NJ, compressor station that is scheduled to last until Thursday (June 13). It is not expected to restrict capacity through Lambertville, but net receipts from Algonquin Gas Transmission would be limited to 400 MMcf/d for the duration of the outage.
“Net receipts fell to 357 MMcf/d after averaging 508 MMcf/d and maxing at 586 MMcf/d over the last 14 days, creating bullish pressure for Texas Eastern M3 prices,” Garcia said.
With a large weather system keeping a lid on daytime temperatures over the region much of this week, that bullish pressure was kept at bay Tuesday as Texas Eastern M-3, Deliveryrose a penny, while Algonquin Citygateslipped 1.5 cents.
Out West, gains were especially meaningful in California, where heat was continued since last week. A relatively mild summer so far has spared the market from extreme volatility, which remains a risk from ongoing pipeline import and storage restrictions, according to Genscape.
“That is about to change as an incoming area of high pressure is expected to drive daytime highs in Southern California to around 10 degrees above normal through Thursday, while the Bay Area experiences temperatures as much as 20 degrees above normal,” Genscape senior natural gas analyst Rick Margolin said.
NGI price data showed SoCal Citygate basis added $1.42 to move back into positive territory on Monday, while PG&E Citygate added 90 cents day/day to also return to the black. On Tuesday, SoCal Citygate basis rose to $1.25 as fixed prices hit $3.595, while PG&E Citygate boosted its premium to benchmark Henry Hub to 64 cents after climbing to $2.978.
In Southern California, cooling demand so far this summer (considered the April-October period in the natural gas market) has been running about 0.14 Bcf/d weaker than last year and 0.27 Bcf/d below the five-year summer-to-date average, according to Genscape.
“This month alone, demand has been coming in about 80 MMcf/d below May, something that has not happened in SoCal since 2011. Month-to-date demand is averaging more than 0.51 Bcf/d below the five-year June average,” Margolin said.
PG&E system demand has also been lagging last year and the five-year average, but is poised to return above the 2 Bcf/d mark for the first time since late winter, according to Genscape.
Elsewhere in the country, Trailblazer Pipeline on Monday increased restrictions at its compressor station 601 in western Nebraska. Operational capacity was reduced to 658 MMcf/d from around 850 MMcf/d because of unspecified operating conditions and became effective for Monday’s intraday 3 cycle.
In addition to the restriction at compressor station 601, maintenance events at stations 602 and 603 are set to reduce capacity on June 12 and 13, producing restrictions of 138 and 153 MMcf/d, respectively, compared to a prior 30-day average.
“Trailblazer picks up the majority of its receipts at Cheyenne Hub. This flow restriction could put downward pressure on Cheyenne Hub, and it’s worth noting that its two primary delivery points are Northern Natural Pipeline and Natural Gas Pipeline Co. of America near Beatrice, NE. Trailblazer says that both primary firm and secondary contracts are at risk of not being fully scheduled,” Genscape analyst Matthew McDowell said.
Cheyenne Hub tumbled more than a dime Tuesday to $1.54.