A hotter turn in weather models was enough to keep natural gas bears at bay Tuesday, one day after September prices sunk to a fresh summer low and put $2 gas into play. The September Nymex gas futures contract settled 4.1 cents higher at $2.111/MMBtu, while October edged up 4.1 cents to $2.124.
Spot gas prices also strengthened as the western and southern United States continued to drive a majority of the nation’s cooling demand, with the hottest weather forecast over Texas. Driven by double-digit gains in the country’s midsection as well as on the East Coast, the NGI Spot Gas National Avg. climbed 8 cents to $1.955.
While Monday was dominated by news that feed gas deliveries to Gulf Coast liquefaction facilities had plunged and Lower 48 production had reached a new all-time high, Tuesday was all about the weather.
Although summer’s end is rapidly approaching, the latest weather models gave bulls some hope for one last hurrah as both the American and European data trended hotter for the northern United States for the second half of August. Until then, however, heat is mostly focused in the South, with Texas still set to see its hottest weather of the summer and the Midwest to East expected to stay variable, with occasional cool fronts passing through in the pattern, according to Bespoke Weather Services.
“Total demand still runs above normal, but not extreme, since the near-term heat is confined to the southern half of the nation,” Bespoke chief meteorologist Brian Lovern said. “With the East getting hotter by Aug. 20, the second half of August may be hotter than the first half on a relative-to-normal basis.”
The forecaster noted, however, that gas-weighted degree days (GWDD) are declining, “so that may not be the case in absolute terms. Risk is growing to match last year’s total GWDD count for August, however.”
Any late August heat would need to last weeks if it were to lead to a meaningful weather-driven rally, especially as bouts of cooler air are still expected to move across the northern United States, according to NatGasWeather. “The net result will be see-sawing temperatures across the northern U.S., leading to swings in national demand every few days over the next two weeks.”
Meanwhile, Genscape Inc.’s estimate of Monday’s production was revised even higher to 91.69 Bcf/d, but Tuesday’s preliminary estimate showed a drop of more than 2.4 Bcf/d based on evening cycle nominations, which showed Lower 48 output down to 89.26 Bcf/d.
In the East, output was down 1 Bcf/d, while Texas showed a drop of 0.72 Bcf/d. There was a 0.42 Bcf/d decline in output from the Permian Basin, while the Gulf, Midcontinent and San Juan Basin each posted drops of 0.1-0.2 Bcf/d, according to Genscape.
The combination of hotter weather and softer production, much of which is tied to temporary maintenance, was enough to boost prices, at least for now. NatGasWeather said it was eager to see how natural gas would trade Tuesday after getting close to $2 and bouncing, “but it does suggest $2 could be a stubborn level to get through shorter term.”
However, that doesn’t mean bears won’t make an attempt. Although Tuesday brought about a nearly 5-cent increase for the balance of 2019 (September-December), with the shoulder season still ahead, a test of support at that level is within reason, “although not fundamentally warranted,” according to Mobius Risk Group.
Such a test can easily be achieved by pressure from the speculative community and/or debt covenant selling from distressed producers, the firm said. Additionally, a pressured West Texas Intermediate crude oil market can often spur additional natural gas hedging from crude-focused producers trying to avoid locking in low liquids pricing but maintaining an adequate boe/d hedge ratio.
“However, this concept is a blunt risk management tool with little to no quantification of dollars at risk, and instead a volumetric target which may not achieve the desired goal of protecting cash flow,” Mobius said.
Spot gas prices continued to strengthen Tuesday, with gains coming in a bit meatier than those seen on Monday. Interestingly, some of the heftiest increases occurred in the Northeast and Appalachia as declining production in the region clearly impacted the market.
Other pricing locations within the region also rose quite a bit despite generally mild weather in the region. In fact, the Midwest to the Northeast was forecast to be comfortable most days through next week because of weather systems with showers tracking through every few days, highlighted by the strongest system in the series Friday and Saturday, according to NatGasWeather. A brief break is expected early next week before another system arrives mid to late in the week.
Most of Texas also strengthened, although gains were limited to less than a dime. In West Texas, meanwhile, spot gas prices continued to decline, moving further into negative territory.
Waha cash plunged 13.5 cents to average minus 12.5 cents, with individual deals reported as low as minus 58 cents.
The steep increase occurred even as Southern California Gas (SoCalGas) announced Monday that pipeline modifications in its Southern Zone will allow it to import about 100-150 MMcf/d more through its Line 2000 (L2000). L2000 has been operating at reduced pressure and had been cut and capped across the Morongo Indian Reservation in Southern California because of the expiration of its lease in March 2018, according to Genscape.
“This had resulted in nominal firm operational capacity being reduced by about half, from 1,200 MMcf/d to 600 MMcf/d, for SoCal’s Southern Zone,” which consists of receipt points with El Paso Natural Gas, North Baja Pipeline and Transportadora de Gas Natural.
“Actual flows could come in higher than this 600 MMcf/d depending on local demand, however,” Genscape natural gas analyst Joseph Bernardi said.
The highest that actual volumes ever rose above the nominal firm operating capacity was around 350 MMcf/d. Now, the firm operating capacity limit has increased to about 750 MMcf/d, as a result of modifications to allow for other parallel lines whose leases are still active to feed L2000.
“The allowance for local demand to increase flows beyond the new 750 MMcf/d firm limit will remain in place,” Bernardi said.