- Warmer late-October sends natural gas futures down another couple notches
- Producer hedging likely behind steeper decreases in calendar strip prices
- Western cash rallies again as cold, pipeline work fuel market
Natural gas futures continued to slide Tuesday even as weather models trended colder around mid-October. However, with nothing pointing to a sustained colder trend, the November Nymex contract settled 1.5 cents lower at $2.288/MMBtu. December slipped nine-tenths of a cent to $2.491.
Spot gas prices continued to climb in most regions even as the second in a series of cold fronts made its way into the southern United States, easing daytime temperatures in Texas and across the Southeast. The increases also occurred as chilly air was set to move out of the East and drop demand. Nevertheless, the NGI Spot Gas National Avg. rose 6.0 cents to $1.890.
Near-perfect temperatures are expected across most of the country through this weekend before another cold shot is expected to sweep across the northern Rockies and Plains late in the week, according to NatGasWeather. The front is forecast to drop overnight temperatures into the teens and 20s before moving through the Midwest and Northeast this weekend with lows of 30s and 40s.
“...What the natural gas markets are likely to notice most is the added demand Oct. 16-18 as a reinforcing cool shot follows to keep conditions a touch chilly across the Midwest and Northeast,” NatGasWeather said.
The pattern would be more intimidating if not for most datasets favoring temperatures warming across the eastern half of the country Oct. 19-23, according to the forecaster. However, the Oct. 18-23 period is subject to colder trends in time and needs watching.
To be sure, confidence remains lower than usual for the 11- to 15-day outlook on the still unclear role west Pacific typhoon Hagibis may have on the larger scale pattern, according to Maxar Weather Desk. A trough diving into the West as the period progresses is related to the typhoon and will supply an expanding coverage of below-normal temperatures into the region.
“Downstream, however, are warming themes with above-normal temperatures from Texas through the Eastern third,” Maxar said. “Compared to the previous outlook, the forecast is more amplified, with warmer changes in the South and cooler changes in the West.”
Models differ in the eastward progression of troughing late in the period, according to the firm. Risks are cooler in association with this feature in the Southwest, but a slower progression could leave the Midcontinent warmer.
The midday Global Forecast System (GFS) model trended further colder for this weekend and next week, but lost demand Oct. 18-23 in a rather bearish set-up, according to NatGasWeather. Overall, the GFS still has quite a bit more heating degree days (HDD) compared to the European model, “so it will be of interest if the afternoon European model adds some HDDs to close the gap.”
Genscape Inc. meteorologists are forecasting Lower 48 population-weighted HDDs will reach as high as 5.6 by the weekend, with the bulk of the transition to heating demand being driven by notably colder-than-normal temperatures across the West. As the cold front makes its way into the central part of the country later this week, Genscape’s supply/demand model is showing demand will tick up to a high of 71 Bcf/d by Thursday and average 68.6 Bcf/d through the next seven days. Next week, even more widespread cooler temperatures have the potential to lift demand as high as 73 Bcf/d.
“Relatively speaking, the market is still very much in the doldrums of shoulder season,” Genscape senior natural gas analyst Rick Margolin said. “The near-term demand outlook is slightly weaker than this same time last year due to this October running slightly warmer.”
In 2018 and 2017, the first major cold shots did not hit until the second week of November; in 2016, the first significant cold spell to lift demand above the 80 Bcf/d mark didn’t arrive until the end of November, according to Genscape.
Given the rapid plunge in prices over the last couple of weeks, Nymex winter prices (November-March) slipped only about a penny to $2.495. Interestingly, though, slightly more significant losses were seen in longer-dated tenors. The Calendar 2020 and Calendar 2021 strips fell 2.05 cents to $2.422 and $2.437, respectively.
This move lower is highly likely because of producer hedging, which can intensify in an environment like the present where asset sales become more likely, according to Mobius Risk Group. “Remaining noncore gas positions held by large independents in need of cash to support crude drilling efforts and distressed gas-only producers are potential targets for the remaining sidelined capital held in the private exploration and production community.”
Fall has finally arrived in the southern United States, and the East was forecast for a mild midweek, but spot gas prices continued to climb Tuesday ahead of another cold shot later this week.
Even as highs were expected to warm back into the mid-60s and 70s across the East on Wednesday and Thursday, a stronger cold shot remained on track to sweep through the country’s midsection and over to the East this weekend. With multiple pipeline maintenance events taking place across the country, prices remained on the offensive in the region.
The crisper fall air in the Southeast led to some of the only losses seen across the country, with Henry Hub shedding 3.5 cents to average $2.225.
Spot gas prices throughout most of Texas also moved lower, but West Texas markets started to recover on Tuesday from downstream demand in the West. Waha cash was up 3.0 cents to average 89.5 cents.
With cooler weather hitting the state, the market will likely be keeping an eye on storage inventories in the South Central region. A lack of transparency in pipeline data makes that difficult, but another key variable that could influence storage activity is wind output, which affects natural gas demand.
Through the first half of this year, wind output averaged nearly identical to year-ago levels, but the impact of growing wind capacity became evident during the third quarter, according to EBW Analytics Group. Wind generation from July to September averaged 196 GW hours/day (GWh/d), which was 48 GWh/d (32%) higher than in the same time frame last year.
“During 3Q2019, higher wind production in Texas reduced power sector gas burn by 29 Bcf (0.3 Bcf/d), for an annualized pace of 116 Bcf/year,” EBW said. “If wind output continues to significantly outperform year-ago levels in the near- to medium term, it could become another bearish factor for natural gas supply/demand balances this fall.”
In the West, cold weather, strong demand and supply disruptions continue to drive up cash prices in the region. “More severe cold and snow this week as these supply disruptions continue could be a dangerous combination with the potential to drive up prices even further,” Genscape analyst Joe Bernardi said.
Northwest Sumas basis on Monday reached above $1.50 for the first time since March, NGI data show. “This was the highest mark for this hub since the tail end of the multi-week rally in February and March that saw an unprecedented single-day average of $158/MMBtu at Sumas,” Bernardi said.
On Tuesday, Sumas’ premium over the benchmark jumped to $2.71 as next-day gas surged 92 cents on the day to average $4.935.
With unseasonably cold weather in the Pacific Northwest for several weeks, gas demand in the region has been coming in consistently higher than normal. Over the last 10 days, this year’s demand has been more than 400 MMcf/d higher than the average demand for this time of year in 2016-2018, according to Genscape.
Normally, Northwest Pipeline (NWPL) would increase its storage withdrawals to help manage increased demand like this, but it is in the midst of a planned three-week shutdown of the Jackson Prairie storage facility in Washington, which began on Oct.1. Inventory changes have dropped essentially to zero since Oct.1 after posting an average withdrawal of 147 MMcf/d on days with net withdrawals in September, Genscape said.
Imports to the Pacific Northwest have also been disrupted with supply availability tighter both from British Columbia (BC) at the Sumas import point and from the Rockies. Deliveries from Westcoast Transmission to serve demand in southern BC, before that gas can reach Sumas, have been steadily increasing over the last several weeks even as Westcoast’s total southbound flow capacity has dipped, according to Genscape. Sumas imports, which averaged 861 MMcf/d in September, have averaged 663 MMcf/d so far in October and have failed to top 730 MMcf/d in that time, despite the higher demand in the Pacific Northwest.
Maintenance on NWPL at the Rangely Compressor is also cutting imports from the Rockies to the region by about 75 MMcf/d, Genscape said. This work started Monday and is expected to last through Saturday.
Westcoast expects its southbound flow capacity toward Sumas to remain essentially the same for the rest of the month, and the Jackson Prairie shutdown on NWPL is scheduled to remain in place for another two weeks. Meanwhile, the early season cold is expected to reach its peak on Wednesday and Thursday, but won’t be limited to the Pacific Northwest and instead will cover much of the Rockies.
Other price hubs out West also continue to strengthen. Opal cash basis reached positive territory on Monday, doing so for just the second time since April 1. On Tuesday, Opal’s premium rose to 90 cents after fixed prices soared nearly 50 cents to average $3.125.
Meanwhile, the storm that is set to bring more cold air and heavy snow to the interior Northwest will kick up winds and raise the risk of wildfire ignition and spread over California during the second half of this week.
Pacific Gas & Electric Co. (PG&E) on Monday warned that it could proactively cut power in what would be an unprecedented Public Safety Power Shutoff across portions of 30 counties, or much of the service area.
"This is shaping up to be one of the most severe dry wind events we’ve seen in our territory in recent years, and we want our customers to be prepared for an extended outage that may last several days,” said PG&E’s Michael Lewis, senior vice president of electric operations.
The company continues to actively monitor the weather and is working directly with state and local agencies to help prepare customers and the public for the safety event, Lewis said. He added that customers should be aware that “it could take several days to fully restore power after the weather passes and safety inspections are completed."