Although the natural gas market is approaching the time of year when weather typically takes a back seat to other market drivers, expectations for more heat later this month drove up September bidweek prices in much of the country.
However, mild weather for some major demand regions combined with near-record production to drive prices lower in other areas of the United States. The NGI September Bidweek Avg. ultimately slipped a penny to $1.93.
Even as the battle between bears and bulls wages on, September prices are well below year-ago levels, off 71 cents from September 2018’s bidweek average. The September 2019 Nymex gas futures contract expired at $2.251.
The dramatic discount in September bidweek prices is largely because of a generally mild summer, with sustained heat mostly concentrated in California, the Southwest and Texas. While the northern half of the country has had its share of extreme temperatures, those heat waves have been bookended by milder conditions. For example, highs from the Midwest to the Northeast are forecast to hover in the upper 60s to mid-80s for the next couple of weeks.
The latest weather models, however, show more widespread heat returning in the coming weeks. While the impending heat may not pack the same punch as it would have in July or August, it is still rather supportive thanks to above-normal heat blanketing the southern half of the nation for the foreseeable future, according to Bespoke Weather Services.
“We also see less demand destruction from Hurricane Dorian, as it stays far enough off the Florida coast to avoid reducing demand as much as previously feared,” Bespoke chief meteorologist Brian Lovern said.
Dorian, which intensified into a Category 5 hurricane over the weekend, has since slowed its course and Monday afternoon had weakened to Category 3. It is still considered a major storm, according to the National Hurricane Center. Dorian, on its forecast track, was expected to move dangerously close to the Florida’s eastern coast through Wednesday evening, then travel near the Georgia and South Carolina coasts into Thursday and hover near the North Carolina coast by Thursday night.
“At the moment, there are not yet any visible impacts to gas flows,” Genscape Inc. senior natural gas analyst Rick Margolin said.
However, the Elba Liquefaction facility near Savannah, GA, was shut down because of a mandatory evacuation order in place in the state. Operator Kinder Morgan Inc. told NGI that it continued to monitor the storm and adjust its hurricane preparedness plans as needed. Operations were expected to resume once the storm passed.
Meanwhile, none of Florida’s major utilities as of early Tuesday had reported any storm-related power outages, and all of the state’s nuclear power units were fully operational.
In addition to Dorian, Tropical Storm Fernand had developed by midday Tuesday. The system was migrating west to northwestward and could bring the center of the Fernand near or over the coast of northeastern Mexico late Wednesday. The storm would likely miss any producing areas but could create “risk of demand destruction along the southern coastlines of Texas and northeastern states of Mexico,” Margolin said.
With the next several weeks expected to produce even more storms, the market was keeping a watchful eye on production, which set multiple highs in August and contributed to the softness in September bidweek prices. As of Tuesday, production was slightly above 93 Bcf.
Meanwhile, the traditional storage injection season is nearing its end, with only eight weeks to go and the deficit to the five-year average still sitting at 100 Bcf. Total inventories stood at 2,857 Bcf as of Aug. 23.
The next two storage reports are currently expected to average less than 90 Bcf, according to Mobius Risk Group. Based on current weather forecasts, Mobius extrapolated the estimates and their implied weather adjusted supply/demand through the end of September. “Such an exercise points to a cumulative injection of less than 450 Bcf, and subsequently a sub-3,300 Bcf start to October,” the Houston-based firm said.
This is an important datapoint because even a 600 Bcf injection in October would not cause the market to “run out of room,” according to Mobius. “Keep in mind that a 600 Bcf injection in October is borderline absurd since this would equate to a five-week average of 120 Bcf builds.”
Furthermore, liquefied natural gas (LNG) feed gas deliveries are also running higher year/year, with Freeport LNG receiving an unladen tanker on Friday ahead of its first export. The second production unit at the Corpus Christi LNG terminal achieved substantial completion last week, and Elba, once operations resume, is nearing first exports. Altogether, U.S. LNG export capacity is set to reach more than 7 Bcf/d by year’s end, up from less than 4 Bcf/d at the end of 2018.
Meanwhile, Kinder Morgan’s Gulf Coast Express pipeline is only weeks away from coming online, unleashing 2 Bcf/d of Permian Basin gas into the market.
What still remains unclear is the trajectory for exports to Mexico. A resolution to the monthslong dispute between Mexican utility Comisión Federal de Electricidad (CFE) and several natural gas pipeline companies was reached in late August, allowing for the start of commercial gas delivery on the Sur de Texas-Tuxpan marine pipeline. However, as of Tuesday, no pickup in flows to Mexico had been observed.
“With the line already packed and tested, startup is expected to be imminent,” Genscape’s Margolin said.
Nevertheless, demand destruction from hurricanes and LNG feed gas flows will be the most important indicators for the market over the next month, according to EBW Analytics Group. Demand destruction from the tropical storms is impossible to predict, but to the extent it may occur, the impact on the gas market would be bearish.
Meanwhile, at this stage of development of the LNG market, potential swings in feed gas flows are also largely unpredictable, EBW said. “If significant terminal shut-ins occur, gas prices could drop significantly.”
The possibility of U.S. LNG shut-ins has been creating a bit of nervousness in the market since global prices have weakened. Although the winter season is quickly approaching, the ongoing U.S.-China trade war has also limited the appetite for the super-chilled fuel. In China, ENN Energy, one of the largest alternative energy distributors in China, has cited the domestic economic slowdown for the lower year/year growth rate in gas supplied to its commercial and industrial customer base.
Outside of China, the trade war has also hit economic growth in Korea and Japan, according to Energy Aspects. In Korea, LNG imports through the two non-Korea Gas terminals of Boryeong and Gwangyang that largely feed industrial gas use have been down by 0.14 metric tons year/year over the May-July period. “South Asian demand has grown year/year, but sequential gains have started to slow.”
California Plunges Despite Heat
Even with heat seen continuing in the Golden State for the next couple of weeks, September bidweek prices came crashing down across California. Unsurprisingly, SoCal Citygate posted the largest decline as prices plunged 62 cents to $2.935.
The dramatic drop occurred even as the region remains limited in how much gas it can import to meet demand. During one of the more recent bouts of heat, Southern California Gas (SoCalGas) had to withdraw gas from the Aliso Canyon storage facility in order to meet strong demand.
This week, several pipelines in the state will further cut imports.
Pacific Gas & Electric (PG&E) Redwood Path maintenance will limit flow capacity to 1,500 MMcf/d on Wednesday and to 1,860 MMcf/d on Thursday.
“This scheduling route accounted for about 1,950 MMcf/d of supply to PG&E during August, even while limited for maintenance during the second half of the month,” Genscape analyst Joseph Bernardi said. This upcoming maintenance will also limit withdrawals from Wild Goose and Central Valley to zero.
Meanwhile, SoCalGas is performing in-line inspections on Line 4000, one of the import lines that has operated with reduced flows for months, along with L235-2 and L3000. This work, which started on Tuesday, would reduce capacity through Saturday for both the Needles/Topock Area Zone and the two Topock points specifically.
The Area Zone would see its firm operating capacity reduced by 70 MMcf/d to 198 MMcf/d. It has flowed an average of 283 MMcf/d in the past month, 15 MMcf/d above its firm operating capacity.
“Reroutes will be needed due to the other impact from this maintenance, which is reducing the two Topock points -- included in the Needles/Topock Area Zone totals -- to zero. They have contributed an average of 148 MMcf/d in the past month, or 52% of the Area Zone’s volumes,” Bernardi said.
Those lost Topock volumes will need to be made up for via increased receipts from Transwestern Pipeline at Needles, according to Genscape.
Finally, planned maintenance on Mojave Pipeline’s Segment 3000 beginning Wednesday is expected to cut about 65 MMcf/d versus the 30-day average.
Over in the Rockies, prices also fell hard as every pricing hub dropped at least 10 cents month/month. Northwest Sumas September bidweek prices tumbled 26 cents to $1.910.
Even the Southwest put up stout losses despite forecasts for continued heat.
Bidweek prices in Texas, however, were on the upswing as the state prepared for more triple-digit temperatures by week’s end.
The Electric Reliability Council of Texas (ERCOT) set a fresh power demand record in August when scorching heat blanketed the state led to the implementation of emergency protocols and boosted real-time power prices to their cap. The grid operator nearly hit a second record the following day when a sizeable chunk of generation unexpectedly tripped offline, but a call for conservation helped ERCOT meet demand.
With more heat on the way, Katy bidweek prices shot up 13 cents to $2.180.
West Texas points were up even more as line-packing continues on the Gulf Coast Express. Waha September bidweek jumped 36.5 cents to average $1.190.
In the Midcontinent, prices were mixed as pipeline maintenance restricted outflows.
Prices across Louisiana and the Southeast were about a dime higher month/month, while the Northeast and Appalachia were mostly a sea of red.
Dominion South was down 19 cents to $1.605, while Transco Zone 6 NY was down 26.5 cents to $1.685.