• December Nymex futures drop 13.4 cents to $2.531; January down 12.6 cents to $2.584
  • Mexico’s IPGN monthly natural gas price index down 7 cents to $3.16/MMBtu in October, compared to $3.23/MMBtu in September
  • “The speculative short position is extending positions to levels that may induce a covering rally similar to what happened earlier this month”: Enverus
  • Western U.S. hubs continue to trade at premiums as storm approaches

A milder-trending weather outlook Monday let the air out of a natural gas futures market struggling under the weight of oversupply. The December Nymex contract, set to expire Tuesday, plunged 13.4 cents to settle at $2.531/MMBtu. January settled at $2.584, down 12.6 cents, while February shed 11.4 cents to $2.541.

In the spot market, a storm approaching the West Coast supported continued premiums at numerous hubs in the Rockies and California, but much of the country saw discounts to start the week; NGI’s Spot Gas National Avg. tumbled 14.0 cents to $2.470.

Milder forecast trends helped sink prices heading into Monday’s trading, and the midday Global Forecast System (GFS) advertised an even warmer outlook, showing less cold for the period from Thursday through Dec. 6, according to NatGasWeather. Additionally, the GFS was “faster to warm up conditions” across the Lower 48 after Dec. 6.

“The natural gas markets are clearly disappointed in such a quick milder trend showing up, but losses could also be exacerbated” by Monday’s options expiration and the looming expiration of the front month contract on Tuesday, NatGasWeather said. “The latest GFS does tease cold continuing across the northeastern U.S. Dec. 7-10,” but coming off a “big loss in demand” from recent data, “it’s possible the natural gas markets won’t bite on anything that far out.”

Commodity Futures Trading Commission data as of last Tuesday (Nov. 19) showed the managed monday short position increasing by 41,816 contracts week/week, while the managed long position decreased by 8,831 contracts, according to analysts at Enverus.

“The speculative short position is extending positions to levels that may induce a covering rally similar to what happened earlier this month,” the Enverus analysts said. “...Prices have defined the area at the island gap ($2.724), which will continue to find sellers on challenges.

“With expiration coming...it is likely that the gap will hold as a cap during expiration, regardless of the bullish history of expirations. For the past two-plus years, the expiration process has provided some sort of rally during the process. On the bearish side, the behavior last week challenged the major area of support (around $2.50). That area is likely to hold declines during expiration.”

Looking at the broader supply/demand picture, loose balances suggest downside price risk going into the new year, according to analysts at Tudor, Pickering, Holt & Co. (TPH).

“While cold weather has made the start to winter an exciting few weeks, weather-adjusted supply/demand fundamentals continue to point to materially lower prices heading into 1Q2020 absent a polar vortex-type event,” the TPH analysts said.

“The combination of stronger than expected updates on coverage gas growth and a robust Haynesville Shale outlook in the first half of 2020 (private sector continuing to drill given hedge books) may force prices toward $2 to ultimately kill activity and start to set a floor” going into the back half of 2020.

West Coast Storm

Spot prices in Western markets moderated Monday, but numerous locations continued to trade at a substantial premium to Henry Hub, carrying over the elevated basis differentials observed last week.

SoCalCitygate averaged $6.145 on the day, down 59.0 cents compared to Friday.

Amid tight conditions on its system, Southern California Gas (SoCalGas) initiated withdrawals last week from the restricted Aliso Canyon facility under a revised protocol approved by state regulators earlier this year.

To kick off the holiday-shortened work week, SoCalGas was projecting total demand on its system of just under 2.6 million Dth/d for Monday, with demand expected to rise to around 2.7 million Dth/d for Tuesday and Wednesday. The utility was forecasting average temperatures in the low 50s to upper 40s in its territory this week.

Farther north, Malin averaged $3.325 Monday, down 19.5 cents. In the Pacific Northwest, Northwest Sumas eased 1.5 cents to $5.930, maintaining a large premium to surrounding hubs.

The National Weather Service (NWS) on Monday was calling for a potentially record-breaking low pressure system to deliver “high winds and heavy precipitation” along the West Coast over the next few days.

“A surface low is forecast to move southeastward through the Eastern pacific while strengthening rapidly,” the NWS said. “The low should reach landfall Tuesday evening near the California/Oregon border.” A “tight pressure gradient” was expected to result in extremely windy conditions, including “storm to hurricane-force winds” offshore and gusts potentially topping 70 mph “along the Oregon coast, in the coastal ranges of Oregon and California, and across higher elevations.”

The NWS called for snow to “spread to much of the Intermountain West and into the Rockies Tuesday and Wednesday, and lower elevation rain could be locally heavy in California especially Wednesday. Colder than average temperatures are expected in the West as well.”

Across the border into Canada, NOVA/AECO C fell C15.5 cents to C$2.735/GJ.

In Western Canada, healthy demand and an inventory deficit to the five-year average have lent support to AECO pricing recently, according to TPH. As of late last week, the firm’s estimates showed intra-Alberta demand “sitting comfortably” around 6 Bcf/d.

“We expect field receipts to remain in the 12 Bcf/d range through the winter until the North Montney Mainline comes online, which is a moving target, but the latest news suggests January,” TPH analysts said in a recent note to clients. “Inventories now sit at a 23% deficit to the five-year average, and we’re currently forecasting the deficit to widen to 25% before inventories start to rebuild in the spring.”

Meanwhile, discounts were the norm for most of the Lower 48 coming out of the weekend, with an 11.5-cent sell-off at benchmark Henry Hub setting the tone for double-digit declines across the Midwest and Northeast.

Joliet tumbled 15.0 cents to $2.335, while Transco Zone 6 NY fell 24.0 cents to $2.315.

Ahead of the system bringing precipitation and chilly temperatures to the Western United States, “mild high pressure will build across the Southern and Eastern U.S. the next few days, with highs of 40s and 50s from the Great Lakes to the Northwest” and 60s and 70s from Texas to the Mid-Atlantic, NatGasWeather said.

“The West system will eject across the Great Lakes and Northeast Wednesday with areas of rain and snow. Another system will track into the West for the second half of the week.”

The forecaster called for “light early-week national demand” to increase by Thursday and Friday.

Mexico Roundup

Mexico’s IPGN monthly natural gas price index averaged 58 pesos/GJ ($3.16/MMBtu) in October, compared to 60.3 pesos/GJ ($3.23/MMBtu) in September.

The Comisión Reguladora de Energía (CRE) used 273 transactions reported by 25 marketers to create the October IPGN, compared to 282 deals from 25 marketers in September.

The total volume of gas transacted dipped to 7.35 Bcf/d from 7.63 Bcf/d.

CRE began publishing the IPGN in July 2017 to serve as a reference for prices until Mexico’s nascent natural gas market develops enough liquidity and transparency for the creation of third-party indexes.

For now, given Mexico’s dependence on pipeline gas imports from the United States, a majority of gas transactions in Mexico are priced using U.S. indexes, namely Henry Hub, Houston Ship Channel, or Waha, plus the cost of transport into Mexico.