Natural gas futures traded both sides of even before nudging higher Tuesday as the bears, taking in a mix of changes to the latest weather outlook, paused for a breather. In the spot market, maintenance wreaked havoc on prices in the Midcontinent and West Texas; the NGI Spot Gas National Avg. dropped 3.0 cents to $1.955/MMBtu.
September Nymex futures settled 2.1 cents higher at $2.137, trading in a range from $2.107 to $2.142. October added 2.1 cents to $2.160, while November climbed 1.9 cents to settle at $2.252.
The mid-day Global Forecast System data came in slightly cooler for this weekend into next week, but it was slightly hotter for Aug. 10-14, enough to add several cooling degree days (CDD) to the outlook, according to NatGasWeather.
But the pattern “still isn’t nearly not enough to impress and maintains a bearish bias due to a barrage of weather systems with showers and cooling forecast to sweep across the Midwest and east-central U.S., including deep into the South,” the forecaster said. “Until the hot upper ridge anchored over the western and central U.S. shifts back across the Great Lakes and East/Southeast the pattern will remain bearish.”
NatGasWeather said there could be another opportunity for more heat to push into the East around Aug. 12-13, but more evidence is needed from the data “if it’s to be expected.” Even if more heat does show up during this time frame, the data “needs to prove it will last, and the hot camp has the burden of proving it...Bears remain firmly in control as long as they hold $2.20, while hoping they can test $2.00 before hotter patterns or tightening in the balance shows up in the data.”
Looking at the recent slide in futures prices, it’s important to note the timing, according to EBW Analytics Group.
“The current sell-off was triggered in part by weather forecasts calling for record heat to be replaced with temperatures close to historical norms. In this sense, the timing is understandable,” said EBW CEO Andy Weissman. “Importantly, though, the plunge in prices comes at a time when CDDs are still high in absolute terms. By the third or fourth week in August, demand is likely to fall off sharply.
“Further, if current forecasts for much warmer-than-normal weather from mid-September through November validate, weather-driven demand could be exceptionally low this fall. Given this feeble demand, steep further price declines seem likely.”
During a conference call Tuesday to discuss BP plc’s 2Q2019 results, CEO Bob Dudley attributed the slump in natural gas prices both in the United States and abroad to a combination of lower demand and a global oversupply of liquefied natural gas (LNG).
“In the gas markets, an easing in demand growth following the exceptional strength seen last year and continued expansion of LNG supply has led to significantly lower prices,” Dudley said. “The Henry Hub gas price remains well below $3.00/MMBtu. And spot prices in Europe and Asia are about 40% below their levels a year ago.
“In the absence of extreme weather conditions, LNG is expected to be over-supplied through 2019 and 2020 with gas prices expected to remain under pressure.”
A mild winter in Asia and a shrinking differential between European and Asian spot prices have resulted in an increase in U.S. LNG exports headed for Europe, according to the Energy Information Administration (EIA). Shipments to Europe accounted for almost 40% of total domestic LNG exports for the first five months of 2019, and exports to Europe surpassed exports to Asia for the first time in January.
“Because the round-trip transportation costs from the U.S. Gulf Coast to Europe are about $1.50/MMBtu lower than those to Asian markets, a sufficiently narrow price spread between European and Asian spot natural gas/LNG prices will make Europe the preferred destination for exporters of U.S. LNG,” EIA said. “The spread between Japan spot LNG and NBP/TTF prices was about $1.00/MMBtu in December 2018 and January 2019, and it reached a low of 60 cents/MMBtu in April, which supported continued high U.S. LNG exports to Europe.”
This also comes as China’s imports of U.S. LNG have dropped off amid the trade conflict between the Trump administration and Beijing.
“LNG from the United States accounted for 7% of China’s total LNG imports in the first six months of 2018,” EIA said. “In September 2018, China imposed a 10% tariff on LNG imports from the United States, and in the months since then (October 2018 through May 2019), U.S. LNG has accounted for 1% of China’s LNG imports.”
Maintenance Hits Permian, Midcon Prices
After averaging in the negatives Monday, prices at Westcoast Station 2 in Canada rebounded Tuesday as the location appeared to recover from the effects of a plant outage in the region.
Westcoast Energy took the McMahon Plant in northern British Columbia (BC) offline for Tuesday’s gas day, impacting an estimated 387 MMcf/d of production based on the past 30 days of flows, according to Genscape Inc. analyst Joseph Bernardi.
The outage coincided with negative prices at Westcoast Station 2 for Tuesday’s delivery, including prices as low as negative C30 cents/GJ. Trades conducted Tuesday for Wednesday delivery saw prices bounce C$1.395 day/day to average C$1.150/GJ.
Westcoast had a system-wide operational flow order in effect as of Tuesday’s gas day, and the pipeline notified shippers that it’s system was under “Red” status, citing both the McMahon plant outage and constraints on southbound flows through its T-South zone.
T-South includes the Station 4B location that has been constrained following the explosion last October near Prince George, BC.
Meanwhile, prices at two other producing regions, West Texas and the Midcontinent, came under heavy downward pressure Tuesday coinciding with maintenance work restricting northbound flows on the Natural Gas Pipeline Co. of America (NGPL) system.
In the Permian Basin, Waha fell 10.5 cents to average 6.5 cents, with trades going as low as negative 20.0 cents on the day. It was a similar story for El Paso Permian, which fell 31.5 cents to average just 11.5 cents on the day, including trades as cheap as negative 35.0 cents.
Further north, NGPL Midcontinent tumbled 99.5 cents to average 85.5 cents.
NGPL declared a force majeure Monday, citing remediation work required on its “Amarillo #3” mainline between Compressor Station (CS) 104 in Barton County, KS, and CS 105 in Cloud County, KS. NGPL advised shippers that the event would limit throughput capacity northbound out of its Midcontinent Zone.
NGPL estimated that the work, which began with Monday’s gas day, would continue through next Monday (Aug. 5).
Genscape analyst Matt McDowell estimated that the force majeure could constrain 600 MMcf/d flowing from NGPL’s Permian and Midcontinent production zones.
“The last time flows were majorly impacted along the Amarillo mainline, pipeline remediation in the Midcontinent zone had also cut off flow to the Gulf Coast mainline and contributed to weakness at Permian hubs and negative spot prices at the NGPL Midcontinent hub,” McDowell said. “Currently there is some reroute capacity through NGPL’s Midcontinent zones. An analogous event in late July and early August of last year did not coincide with any cash movements at associated hubs.”
Prices were generally steady across most other areas of the Lower 48 Tuesday, though heat-driven premiums came down by double digits at a number of locations in Southern California and the Desert Southwest.
“Conditions will be hot over the western and southern U.S. into the foreseeable future, with highs of upper 80s to 100s, hottest over the Southwest and Texas,” NatGasWeather said. Following hot conditions along the East Coast Tuesday “a fresh weather system and associated cool shot will track through the Midwest and Ohio Valley the next few days, then across the East Thursday and Friday, easing national demand to lighter levels.”