A perplexing surge in natural gas forward markets continued for a third straight week, stacking double-digit gains on top of already hefty prices through the upcoming winter, according to NGI’s Forward Look.
Nymex Henry Hub futures set the tone for the week, trading higher on Sept. 9 as weather data pointed to steamy summer weather lingering awhile longer. Although heat projections held up in next-day outlooks, the massive short-covering rally that began in late August, which some analysts considered overdone, finally began to lose steam, with October futures slipping a half-penny on the day. A more definitive, though modest, decline was seen midweek, with the prompt month settling at $2.552, which is still about 12 cents higher from Sept. 6.
“Although red numbers were posted for nearby futures contracts, the spot market at Henry Hub did go out on intraday highs, with a few trades seen back near the $2.60 mark or slightly above,” Mobius Risk Group said.
However, the cash market could be nearing a significant pullback as well. The latest weather models made an unusually large cooler change on Thursday, drastically reducing the level of heat in the eastern third of the nation for the coming week, according to Bespoke Weather Services.
The shift was most pronounced in the American ensemble data, which showed around 15 fewer forecast gas-weighted degree days (GWDD) for the 1-15 day period in total, “a magnitude we don’t often see at this time of the year,” the forecaster said. The European model was cooler as well, but its GWDD change was less than half of the American models.
Friday’s weather data continued to trend more bearish, with further cooler changes in the East for the week of Sept. 16-20, and some lower demand adjustments at the start of the following week, according to Bespoke Weather Services. A strong upper level trough off the East Coast is responsible for the near-term changes, although there is still some solid heat for this time of year from the Midwest down into the South. Other weather pattern trends are driving the lower demand for the latter part of the month.
Tropical activity remains a wildcard, according to Bespoke, as models still differ regarding what happens with the disturbance near the Bahamas. The European model “strengthens this into a formidable hurricane, but keeps it offshore.” The American data is much weaker, but has the system making landfall as a tropical storm in Florida, “which would lower demand some this weekend if correct,” Bespoke chief meteorologist Brian Lovern said.
The National Hurricane Center (NHC), which expected the disturbance to become a depression or storm later on Friday, said the system was “barely moving” but was expected to resume a slow motion toward the northwest and north-northwest. On its projected track, the system would move across the central and northwestern Bahamas Friday and near the east coast of Florida throughout Saturday.
The pattern the last 10 days of September still is favored to be rather bearish as a more seasonal flow sets up over the southern and eastern United States, according to NatGasWeather. High temperatures are forecast to be very comfortable in the 70s and 80s for most of the country.
“Overall, bulls have maintained control all this week despite bearish weather trends” for the coming week and a bearish pattern favored the last 10 days of September,” the firm said. “This begs the question, did prices hold up this week because there were still too many speculative bears trapped, or do the natural gas markets truly view $2.60 on October as fair priced?”
Indeed, after another move higher on Friday, the timing of a meaningful retreat remains anyone’s guess, since the extreme rally has outstripped any fundamental market changes and is largely due to financial positioning, according to EBW Analytics. Recent price moves have been a partial result of large funds trying to force additional rounds of short-covering and “momentum trading” rather than a well-reasoned view of changing underlying fundamentals.
“As a result, while harder to predict, the market will settle out and fundamentals reassert when volatility dies down and major moves become less likely, in turn decreasing the likelihood of large pushes by long and short traders alike,” EBW said.
Over the next 30-45 days, it is likely that fundamentals may again reassert themselves as the primary drivers of natural gas futures. Given rising production, likely bearish fall weather, potentially weak liquefied natural gas (LNG) demand, weak comparisons to last year’s November chill that fueled Nymex futures and a soaring year/year surplus, the likely trajectory for prices is downward, according to EBW.
In the meantime, though, a small bullish surprise in the latest storage data on Thursday sparked a rebound in October prices. The Energy Information Administration (EIA) reported a 78 Bcf injection into inventories for the week ending Sept. 6.
The reported build was a few Bcf shy of estimates calling for an injection in the low 80s Bcf, but was still far above last year’s 68 Bcf build and the five-year average injection of 73 Bcf.
Shortly after EIA’s report crossed trading screens at 10:30 a.m. ET, the October Nymex contract climbed from around $2.536 up to as high as $2.578. By 11 a.m. ET, the front month was trading around $2.561, up almost a penny from Wednesday’s settle and several cents higher versus the pre-report trade.
Once traders had time to fully digest the data, the October contract moved back into the red, but then a late-session rally lifted the prompt month to a $2.574 settle, a gain of 2.2 cents on the day. November rose 1.6 cents to $2.605.
Bespoke considered the EIA report as “neutral” overall, as it could be a small make-up for the previous week’s higher print, but also because of the complicating factors involved with the Labor Day holiday and some very strong heat and demand in the South.
“Rather than searching for a big takeaway from this report, we prefer to see how things shake out from here,” Lovern said.
The game is now on to try to pinpoint where end-of-season inventories will land. During a discussion on energy chat room Enelyst, managing director Het Shah said that between “huge production” on one hand and LNG demand growth on the other, “it’s hard to say what end-of-season storage level keeps us comfortable” heading into the winter.
Indeed, after numerous delays, LNG intake is set to grow significantly next year as new production units at Freeport, Cameron and Elba enter service.
Freeport, which during the startup of its liquefaction process experienced a gas leak from a flare bypass vent line and later a gasket rupture and refrigerant leak, loaded and shipped its first commissioning cargo from Train 1 on Sept. 3. A second cargo departed the terminal on Thursday. Train 2 at the Texas facility is nearing a scheduled January 2020 in-service, and Train 3 is set to begin operations in May.
“Freeport was targeting Train 1’s full service by the end of September, but with the recent delays and potential pipe replacement work, it’s possible that timing could slip once again,” RBN Energy analyst Sheetal Nasta said in a recent blog.
Cameron delivered its first commissioning cargo on Aug. 5, but reports of a force majeure at the Hackberry, LA, facility circulated on Friday. Although unable to be confirmed at presstime, deliveries on the Cameron Interstate Pipeline dropped about 3,000 Dth day/day, according to NGI’s U.S. LNG Export Tracker.
Meanwhile, weather and construction delays have pushed back the start of operations for the second and third trains to the first and second quarters of 2020, respectively.
Over at Elba Liquefaction, Hurricane Dorian temporarily stalled work last week at the Chatham County, GA, terminal. The first of 10 modular mini-trains was due to go online by the end of March, with the remainder set to enter service sequentially throughout the rest of 2019.
However, regulatory delays and equipment issues ultimately resulted in Elba seeking in-service in mid-August, although that approval has yet to come. Project developers continue the commissioning process for Trains 2 and 3 at the facility, however.
“It’s safe to say that between weather, construction and regulatory logistics, these projects have had a tough go of it,” Nasta said.
Meanwhile, production more or less continues to fire on all cylinders. Although Lower 48 production saw a “moderate retreat” since the Sept. 7-8 weekend, output remains near all-time highs in the low 90s Bcf/d. Wednesday’s estimate showed production coming in slightly below 90 Bcf/d, down about 0.9 Bcf/d day/day, driven by declines in the Northeast, the Rockies and the Midcontinent, according to Genscape Inc.
During the Sept. 7-8 weekend, production topped 92 Bcf/d, Genscape senior natural gas analyst Rick Margolin said. Including Wednesday’s estimate, “month-to-date production is averaging about 91.6 Bcf/d. This is about 0.55 Bcf/d greater than our forecast headed into the month led by outperformance from Texas, West Virginia, northeast Pennsylvania and Ohio producing areas.”
With temperatures set to heat up again in southern California, cash markets surged this week and lent support to forward prices. AccuWeather was looking for temperatures in Los Angeles to heat up through the weekend, reaching the 90s by Friday.
With pipeline import restrictions still in place, and storage withdrawals in play, SoCal Citygate October prices shot up 26 cents from Sept. 6-11 to reach $3.384, a roughly 7-cent premium to Wednesday’s cash price, according to Forward Look. The winter strip gained an even more impressive 31 cents to hit $4.41, while next summer’s price level rose a nickel to $2.79.
Prices in the northern part of the state were also stronger than most of the rest of the country. PG&E Citygate October was up 19 cents to $3.103, the winter was up 11 cents to $3.21 and the summer 2020 strip was up 4 cents to $2.76.
In the Pacific Northwest, there are signs of continued progress in restoring flows from British Columbia following the explosion last October on Westcoast Transmission. The pipeline posted a notice Wednesday stating that engineering assessments have been progressing according to plan on sections of line similar to the one that exploded last fall.
Pipeline operator Enbridge Inc. expects that, given this progress, flows through the T-South system in southern BC will be able to increase to 90-95% of firm capacity by Nov. 1, and that the full system capacity will return by mid- to late November.
These flows recently increased at the end of August as a planned month-long block of inspections was completed, bumping capacity up to roughly 1,200 MMcf/d from around 900 MMcf/d.
“This put flows through the Station 4B South meter back within the neighborhood of the previous three-year average, rather than 400-500 MMcf/d below that average as they had been for most of August,” Genscape natural gas analyst Joseph Bernardi said. “The anticipated further increases to 90-95% of capacity by Nov. 1 would represent another roughly 320-415 MMcf/d increase versus the current volumes.”
Forward prices for the coming winter at the downstream Northwest Sumas have responded to the progress on inspections and positive winter outlook from Westcoast over the last month.
Sumas basis winter futures averaged 55 cents and never fell below 45 cents from April 1 through Aug. 15, Forward Look data show. However, beginning on Aug. 16, winter basis has not exceeded 40 cents and has dropped as low as 20 cents.
As of Wednesday, the Sumas winter strip stood some 39 cents ahead of the corresponding strip at benchmark Henry Hub.
Over the last three years, however, Sumas forward prices for the upcoming winter have ranged between minus 69 cents and plus 1 cent.
“So this recent 20- to 40-cent range is still much higher than the normal ranges, possibly indicating concerns about the risk of additional incidents or maintenance schedule delays on Westcoast,” Bernardi said.
Meanwhile, Permian Basin prompt-month pricing is nearing the $2 mark as Kinder Morgan Inc. continues to commission its Gulf Coast Express project. The 2 Bcf/d pipeline is already flow some gas, and full in-service could come as early as next week, according to management.
Since Aug. 12, around the time Kinder Morgan revealed that it had started commissioning the GCX line, Waha basis has averaged around minus $1.150. By comparison, between the June 11 and Aug. 9 trade dates, Waha basis averaged minus $1.945.
Since mid-August, when NGI began recording GCX-related transactions as part of its daily spot price survey, Waha basis has traded as close as 58.5 cents back of Henry Hub, with basis generally hovering around minus $1.000-1.500, NGI’s Daily GPI historical data show.
As for forwards, Waha October as of Wednesday stood nearly 80 cents below Henry Hub, while November was just 70 cents lower. The full winter strip sat at a 77-cent discount, while next summer’s discount was at a much wider $1.31, Forward Look data shows.
With GCX expected to fill quickly, the Permian is seen constrained again by next year, with the market awaiting the start of operations for Kinder Morgan’s second 2 Bcf/d pipeline out of the basin, Permian Highway.