Coming off big gains the previous two sessions, natural gas futures stalled Tuesday as a rally in the early morning hours quickly lost steam. The October Nymex contract settled at $2.580/MMBtu, off 0.5 cents after trading as high as $2.648. November also fell 0.5 cents to settle at $2.620.
In the spot market, strong September heat drove gains across the Midwest and East as Southern California prices moderated; the NGI Spot Gas National Avg. added 6.5 cents to $2.365/MMBtu.
Weaker spot prices at Henry Hub on Tuesday sapped the market’s momentum after it looked like the front month contract was poised to continue climbing, according to Bespoke Weather Services.
“As we have pointed out, this market is a cash-led one, and once cash prices came out a little weaker day/day, the early rally had reversed, especially at the front of the curve,” Bespoke said. “...The weather side of the equation remains bullish, with strong late-season heat in place, and that likely has had some enhancing effect on the cash market as well, hindering the ability to refill salts thanks to the higher demand.”
Futures prices could come under further pressure in the near term should the weaker cash prices Tuesday prove to be the start of a trend, the forecaster said.
“A bigger test for cash will be starting late next week once demand really falls off,” Bespoke said. “We do see some cooler variability late month, though we suspect warmth comes back into October, which would gradually morph into a bearish factor if correct.”
Futures prices have rallied sharply since late last month, including an 8.9-cent rally for the October contract in Monday’s trading. Market observers have pointed to short-covering, and not so much the underlying fundamentals, as the major catalyst for the recent gains.
Taking a longer-term look at the supply picture, Energy Aspects said in a recent note to clients that even with Appalachian producers tightening their belts, production growth out of the region is likely to continue into next year.
“Most of the major Appalachian producers that have reported” 2020 capital expenditures (capex) “are pointing to decreased capital outlays next year,” Energy Aspects said. “Those reductions in capex in some cases will translate into lower rig counts,” along with drilled but uncompleted (DUC) wells “given drilling costs in these are already sunk.
“We still see continued growth in production in the basin over the course of winter 2019/20 due to the inventory of quality DUCs and liquids-directed activity,” the firm added. “However, there is increasing uncertainty around the rate of production growth in late 2020 given the reduction in capex and rigs, with more cuts potentially in the offing.”
Based on the recent round of 2Q2019 financial results, Appalachian-focused producers are less hedged compared with a year ago, but they still are hedged at prices above the recent Henry Hub forward curve, Energy Aspects said.
“This suggests that a fair amount of production is still protected at attractive pricing versus the current forward strip,” according to the firm.
Appalachia’s DUC resources, assuming operators continue completing around 15-20 wells per month and avoid completing less productive wells drilled before 2017, could become exhausted by 4Q2020, Energy Aspects said. Output from completing DUCs “will still be significant enough to mask slower activity in the basin...the decline in the base of horizontal production would be 10 Bcf/d in 2020 without continued drilling or DUC completion, according to our modeling.”
This comes as Goldman Sachs recently lowered its forecast for natural gas and liquids prices for 2020-2021 based on unrelenting Lower 48 supplies and potentially lower demand, barring a cold winter.
“With additional Permian Basin connectivity to Henry Hub markets upcoming and the Haynesville Shale rig count still robust, we believe we do not need as strong a price signal for gas-by-choice drilling,” said analysts led by Brian Singer.
Along the same lines, the Energy Information Administration (EIA) has lowered its forecast for natural gas prices, dropping its projected Henry Hub spot price average to $2.55 for 2020, down 20 cents from a forecast issued last month.
EIA expects U.S. gas production to average 91.4 Bcf/d this year, up 8 Bcf/d from 2018. Monthly average gas production is likely to grow in late 2019 and then decline slightly during 1Q2020 as the impact of gas prices helps to curb volumes. However, EIA expects production to pick up in 2Q2020, with next year’s volumes estimated to average 93.2 Bcf/d.
Production growth has seen storage injections outpace the five-year average this refill season. EIA projects end-of-season storage at 3,769 Bcf, slightly higher than the five-year average and 16% higher than October 2018 levels.
Meanwhile, liquefied natural gas (LNG) feed gas deliveries have pulled back since starting the month at close to 6.6 Bcf/d, according to Genscape Inc. Volumes for Tuesday were down to 5.4 Bcf/d.
A three-day planned maintenance event on the Transcontinental Gas Pipe Line (aka Transco) impacting north-to-south flows through its Station 45 dropped deliveries at an interconnect with Cheniere Energy Inc.’s Sabine Pass terminal to zero Tuesday, Genscape analyst Allison Hurley said.
“Nominations headed to Sabine Pass LNG via Creole Trail have increased about 567 MMcf/d to accommodate for the loss of volumes from Transco,” Hurley said. “Total aggregate flows to Sabine Pass have dropped by roughly 290 MMcf/d today compared to the previous seven-day average.”
Heat Lifts Midwest, East
Spot prices in the Northeast gained sharply for a second straight day Tuesday as hot temperatures blanketing the southern portion of the country were expected to migrate further north. After surging 46.0 cents on Monday, Algonquin Citygate tacked on another 26.5 cents Tuesday to average $2.610.
The National Weather Service was calling for “ongoing heat across the South” to “continue spreading north and east into the Midwest and Northeast.” This should lead to “high temperatures generally from the mid-80s to mid-90s across a large portion of the Central and Midwestern states into the East by Wednesday.”
Maxar’s Weather Desk was calling for temperatures in Boston to peak on Wednesday at around 10 degrees above normal, including highs in the mid-80s. New York and Philadelphia were expected to see temperatures approach the upper 80s to low 90s Wednesday.
Midwest locations also joined in on the upward move, which occurred occurred despite a retreat at benchmark Henry Hub. Joliet added 13.0 cents to average $2.445. Upstream in Appalachia, Dominion South climbed 13.0 cents to $2.100.
Maxar was expecting temperatures to remain around 10-15 degrees warmer than normal for Chicago through Thursday, with highs in the upper 80s. The forecaster similarly predicted much stronger than normal heat for Memphis and St. Louis over the next couple of days.
A significant number of cooling degree days have been added to the outlook over the past week, putting demand for the month of September on pace to surpass the year-ago period that featured record-setting heat, according to Genscape.
“We could end up setting a new record for the hottest September ever for the second year in a row,” Genscape analyst Eric Fell said. Based on Tuesday’s weather outlook, “the first 23 days of September are now forecast to be even hotter than last year. Since last Friday, Genscape’s Daily S&D Lower 48 demand forecast for the next 14 days (Sept. 11-23) has increased an average of 1.8 Bcf/d, including more than 4 Bcf/d added to Sept. 20.”
Elsewhere, the recently elevated prices at points in Southern California and the Desert Southwest pulled back Tuesday amid indications of more slack on the Southern California Gas (SoCalGas) system.
Coming off a stretch of higher demand and import constraints, SoCalGas was projecting more moderate demand on its system over the next few days at around 2.0-2.2 million Dth/d through Thursday, versus receipts of around 2.4-2.5 million Dth/d. The utility was expecting weighted average temperatures in the mid 70s Wednesday and in the lows 80s Thursday and Friday.