• Natural gas futures slide again as lackluster demand seen lasting through at least mid-October; cash still weak
  • Production posts significant drop, but revisions likely
  • Exports higher as flows to Mexico increase, Elba Island LNG enters service

With only pockets of demand across the United States, a significant drop in production on Tuesday did little to stop a slide in natural gas prices that has left the prompt month nearly a quarter lower than it was a week ago. The November Nymex gas futures contract fell another 4.7 cents to settle at $2.283/MMBtu. December dropped 2.4 cents to $2.48.

Cash prices were mixed as the upper high pressure that is keeping Texas temperatures in the 90s is also resulting in comfortable conditions across the core Midwest and Northeast. Western markets posted some of the largest day/day changes, and the NGI Spot Gas National Avg. ultimately fell just a half-cent to $1.925.

The mild temperatures and extreme bearish sentiment are a stark reminder that natural gas is a weather-driven market. Futures traders didn’t bat an eyelash when Lower 48 production on Tuesday was reported about 2 Bcf/d lower day/day, after surging above 92 Bcf/d during the weekend. Exports to Mexico were also higher, and federal regulators on Monday gave a Kinder Morgan Inc. affiliate permission to begin commercial operations at the first production unit of the Elba Island liquefied natural gas (LNG) export facility in Georgia. Nevertheless, futures prices were lower out of the gate and dropped as low as $2.268 before going on to settle a bit above that level.

“Clearly, production is much too strong, evidenced by above-normal national cooling degree days all summer long being able to only result in two smaller-than-normal builds,” NatGasWeather said. “As such, until the supply/demand balance shows considerable tightening, the background state will remain bearish.”

Unfortunately for market bulls, there is little fundamental data that would support a sustained move higher, according to Bespoke Weather Services. On the weather front, the overnight data all shaved off some demand from the overall outlook, as demand was seen above normal for the remainder of this week but then below normal for next week.

The firm did not see any changes in weather patterns that would significantly alter the expectation for temperatures to lean to the warmer/lower demand side of normal going forward. It viewed the mild conditions likely lasting beyond Day 15 as well, based on the signals and the look of the pattern at the outlook period.

“As long as we see little notable demand on the way after this week, risk still ultimately favors a test of $2.25 in prompt month at some point,” Bespoke said.

The midday American weather model added back in the lost demand and then some, but still failed to boost prices. There will still be brief cool shots across the northern United States in the weeks to come, as well as localized heat across the southern part of the country, but overall, the coming pattern after this Saturday is not nearly hot or cold enough to intimidate, according to NatGasWeather.

“No change overall as a much colder pattern for the second half of October is going to be needed to put any scare into this market,” the firm said.

With several weeks of low projected demand ahead, market confidence in having adequate storage supplies ahead of winter is high. Last week, government data surprised to the upside with the first of what is expected to be several triple-digit storage builds during the last month of the traditional injection season.

Analysts have pinned the whopper storage build, which came in around 10 Bcf above consensus, on rampant production that is now hitting the market with the in-service of the Kinder Morgan Inc. (KMI) Gulf Coast Express (GCX) pipeline. Actual volumes on GCX are hard to come by, but all indications are that flows are ramping to near capacity, according to RBN Energy LLC. As an intrastate pipeline entirely within Texas, GCX isn’t required to post daily flow data like federally regulated interstate pipelines.

KMI management recently indicated the pipeline was flowing close to 1 Bcf/d a couple of weeks ago, but “industry chatter since then suggests that it has continued to ramp up and is perhaps now close to its capacity of 2 Bcf/d,” RBN analyst Jason Ferguson said. Available flows and pricing data suggests the new route likely siphoned some of its volumes from the Midcontinent and other Texas intrastate pipelines leaving the region, according to RBN.

“That means those other pipelines possess spare capacity and will be able to accommodate expected gas production growth during the last three months of this year.”

However, with Nymex futures pricing well below $3 even through the winter, producers are likely grappling with difficult decisions regarding risk tolerance, according to Mobius Risk Group. Several producers have already announced reductions in their drilling activity, but the pressure is on to tighten the purse strings even more. While the upcoming 3Q2019 earnings season could shed more light on production guidance into 2020, the latest data from Baker Hughes, a GE company, shows that the U.S. rig count fell another two units to 146, marking the sixth straight week of contraction for the U.S. count.

In the nearer term, until weather forecasts show meaningful heating degree day accumulation, speculative traders will be only moderately concerned with upside potential, Mobius said. “Weekly injections falling back below the century mark will likely be the first cue for speculative participants to reassess short positions.”

West Texas Strength

It may be hot in Texas, but only markets in the western part of the state finished the day in the black as prices continue to strengthen following the start of full operations on GCX. Highs were expected to hold steady in the upper 80s to lower 90s across Texas on Wednesday, but some cloud cover was enough to soften demand a bit and lower prices.

Houston Ship Channel spot gas fell 3.5 cents to $2.265, while Transco Zone 1 in South Texas dropped 6 cents to $2.28.

Conversely, Waha cash jumped 14 cents to $1.34, less than $1 back of benchmark Henry Hub. Earlier this spring, the discount to Henry was as much as $8.

Permian gas basis prices are now on par with those in the Midcontinent region, where a lot of Permian gas has been flowing over the last few months, according to RBN. OGT spot gas averaged $1.33 on Tuesday after dropping 5.5 cents on the day.

With Waha now trading within only a few cents of the Midcontinent markets, Permian outflows north to the region have started to drop and are being diverted instead to GCX for delivery into South Texas, RBN said. While Waha basis still lags well behind South Texas, where gas is trading 5-10 cents under Henry Hub, it has recently pulled ahead of prices in Appalachia, where the major hubs have dipped to as much as $1.00 below Henry.

“Not bad, considering that gas is generally just a byproduct of crude oil-focused drilling in the Permian, versus being the primary target in many areas of the Northeast,” Ferguson said.

Farther east, prices were mostly lower across Louisiana and the Southeast. A couple of points on Tennessee Gas Pipeline (TGP) were the exception, however, as prices edged up a couple of cents day/day. That’s likely due to a scheduled maintenance event to be conducted from Wednesday to Thursday at TGP’s compressor station 860 in Lauderdale County, AL. During this time, which is expected to see significantly warmer-than-normal temperatures, operational capacity will be reduced to 1.2 Bcf/d.

“Flows through the station have averaged 1.41 Bcf/d over the past 30 days. Therefore, approximately 210 MMcf/d of gas flows northeastward towards Kentucky will be restricted over these two days,” Genscape Inc. natural gas analyst Dominic Eggerman said.

In Appalachia, Texas Eastern Transmission on Tuesday began a month-long outage on its Bedford, PA, compressor station. The Bedford, Chambersburg and Heidlersburg compressors have capacities of 2,254 MMcf/d, 1,797 MMcf/d, and 1,682 MMcf/d, respectively, according to Genscape. Each station is to be reduced by 146 MMcf/d for most of the month, except between Oct. 8-10, when each would be reduced by roughly 500 MMcf/d.

“This represents a 132 MMcf/d cut compared to 30-day maximum flows through these compressors,” Genscape analyst Josh Garcia said. “Flows should not be affected before Oct. 8, but flows could be affected if temperatures drop significantly after Oct. 10.”

Appalachia next-day gas prices were mixed as Texas Eastern pricing hubs slipped a couple of cents, while Columbia Gas rose 3.5 cents to $1.64.

In the Northeast, Algonquin Citygate cash jumped 14 cents to $2.005, while Transco Zone 6 NY fell 4 cents to $1.65.