Warmer forecast trends over the weekend added fuel to the recent short-covering rally Monday as natural gas futures extended their run higher. The October Nymex futures contract surged 8.9 cents to settle at $2.585/MMBtu, while November picked up 7.4 cents to settle at $2.625.
In the spot market, late-season cooling demand helped drive double-digit gains across much of the Lower 48 to start the week; the NGI Spot Gas National Avg. climbed 18.0 cents to $2.300.
Given data indicating speculators have been carrying considerable short exposure, market observers have characterized the recent futures gains as a product of short-covering more so than fundamentals. As a group, the net short position among professional speculators had approached a near-record level prior to the recent rally, according to INTL FCStone Financial Inc. Senior Vice President Tom Saal.
Last week’s Commitment of Traders report from the Commodities Futures Trading Commission, reflecting data from Sept. 3, showed managed money reducing short positions by 25,375 contracts while increasing length by 10,777 contracts, according to analysts with Enverus (formerly Drillinginfo).
The data “provides additional evidence that the speculative trade may be changing some of its expectations,” the Enverus analysts said. “...While the short covering will cause prices to rally, long-term price runs will need not only short covering but also new length entering the market. To date, the majority of the gains in price have been attributable to the short covering. The other issue the market will potentially need to address is the total amount of short positions that it could be forced to cover and the potential volatility that covering will likely produce.
“...The gains of last week have set up an interesting struggle for near-term action.” Breaking above resistance between $2.49 and $2.52 could “take prices to the 200-day moving average ($2.629), potentially disavowing the bearish sentiment that has held the market for the past three months,” the analysts said.
The forecast for the next 10 days trended warmer over the weekend, but NatGasWeather pointed to “a continued short squeeze” as the main driver of Monday’s gains.
“We weren’t surprised there was a short covering rally, aided by other factors like hotter trends” and new liquefied natural gas (LNG) export demand, “but we are surprised front month prices have rebounded as high as they have,” NatGasWeather said. “Once the short squeeze finally ceases, at whatever price that might be, we suspect the supply/demand balance will need to have shown solid tightening to justify recent gains, or major players could view it as a shorting opportunity.”
As for the mid-day guidance Monday, the forecaster noted the addition of a few more cooling degree days around mid-September in the Global Forecast System data.
Recent hotter trends have “decreased forecast build sizes the next several weeks from 90-100 Bcf to 80-90 Bcf,” NatGasWeather said. “Still hefty builds, just not quite as big as they would have been without hotter trends. But is it really bullish enough to justify the huge jump in prices with market estimates for end-of-season carryout little changed and still around 3.75 Tcf?”
Spot prices rallied from coast to coast Monday as forecasts called for warm-to-hot conditions across much of the country over the next several days. Benchmark Henry Hub gained 14.0 cents to average $2.640.
“Unseasonably strong high pressure will dominate the southern and eastern halves of the country with highs of 80s and 90s for strong late-season demand,” NatGasWeather said. “The Northwest, Rockies and Upper Midwest will be unsettled with showers and highs of only upper 50s to lower 70s for light demand. The important corridor from Chicago to New York City will be very warm mid-week with highs of mid-80s, but quite comfortable before and after.”
In the Midwest, Michigan Consolidated picked up 17.0 cents to $2.340.
Genscape Inc. analysts are looking for Lower 48 demand to remain “steady and relatively strong” over the next two weeks as much of the eastern half of the country experiences slightly above-normal temperatures.
The firm’s daily supply and demand modeling as of Monday showed demand averaging 73.4 Bcf/d for the current work week, including a high of 75.8 Bcf/d around Thursday. Over the next two weeks, Genscape forecasts show demand averaging 72.4 Bcf/d, which would surpass year-ago totals by around 1.5 Bcf/d.
Maintenance scheduled to start Tuesday and run through early next week was expected to limit flows on Texas Eastern Transmission’s (Tetco) 42-inch diameter Line 38 between Linden, NJ, and the end of the line, according to Genscape analyst Josh Garcia.
“As a result, deliveries to Consolidated Edison’s (ConEd) Manhattan meter will be shut in for the duration of the event,” Garcia said. “This location is ConEd’s main delivery point on Tetco and has averaged 194 MMcf/d of demand in the last 14 days, with a max of 212 MMcf/d.
“While this is ConEd’s second largest meter overall, it has several other large meters” on the Transcontinental Gas Pipe Line, Tennessee Gas Pipeline, Algonquin Gas Transmission and Iroquois Gas Transmission systems and “will likely be able to supplement its demand from those pipes.”
Elsewhere on the Tetco system, the operator was planning to conduct “detailed investigations” in accordance with a Department of Transportation integrity program on its 24-inch diameter Line 3 between the Lebanon and Sarahsville compressor stations in Ohio. The investigations were scheduled to start Tuesday and continue until further notice.
“That work could impact up to 132 MMcf/d flowing through this segment versus the previous two-week max, affecting deliveries into the Midwest through the Lebanon Lateral,” Garcia said.
Some of the largest gains were recorded in California Monday. After selling off on Friday, most locations in the Golden State rallied, led by a 52.5-cent gain at SoCal Citygate, which averaged $3.495.
Utility Southern California Gas (SoCalGas) was expected to conduct a one-day maintenance event impacting more than 300 MMcf/d of imports on Tuesday, according to Genscape analyst Joe Bernardi. Electrical system maintenance was expected to limit capacity through the PG&E (aka, Pacific Gas & Electric) and Elk Hills points at Wheeler Ridge to 80 MMcf/d, versus a combined average of 413 MMcf/d over the prior 30 days, the analyst said.
“They were also reduced for maintenance back in mid-July, cutting 286 MMcf/d day/day,” Bernardi said. “That event was longer than this one, but prices only responded when both import capacity was limited and also when demand spiked during the latter portion of that work. Before that, the initial flow cuts day/day were made up via increased storage withdrawals.”
On the topic of storage withdrawals, late last week and over the weekend SoCalGas reported a series of withdrawals from the restricted Aliso Canyon facility.
“SoCalGas has withdrawn from Aliso Canyon on gas days Aug. 20, Aug. 28 and Sept. 6 under the new withdrawal protocol,” Bernardi said. “Across those three gas days, demand averaged around 2,520 MMcf/d, a decent amount above the summer-to-date average of around 2,180 MMcf/d since April 1, but not terribly far above the average since Aug. 1 of around 2,460 MMcf/d.”
The recent withdrawals each occurred after consecutive days of elevated demand, the analyst noted, with demand averaging 3,020 MMcf/d on Aug. 26-27 and 3,511 MMcf/d on Sept. 4-5.