Weather models finally converge; mild outlooks sends Nymex natural gas lower
Freeport LNG’s second train producing; Train 3 initial production seen by end of March
Cash prices slide as balmy weather on tap for several days
It was the sign natural gas traders had been waiting for, so when the midday Friday run of the American weather model dropped a whopping amount of demand from its long-range forecast, and the late European model held firm in its milder stance, Nymex futures went tumbling. The January contract settled at $2.334, down 9.0 cents on the day. February fell 7.9 cents to $2.319.
Spot gas prices were mostly lower as well, with a rather unexciting weather pattern forecast through Tuesday before a frigid cold shot was expected to sweep across the Midwest and Northeast. The NGI Spot Gas National Avg. fell 7.0 cents to $2.275.
Like the gas market, weather forecasters had grown frustrated with the wide discrepancy between weather models, with nearly 40 degree days between them earlier in the week. NatGasWeather had warned that it would have been dangerous to hold a position had either model not moved significantly one way or the other.
In its midday Friday run, the Global Forecast System (GFS) moved decidedly lower, shedding a “hefty” 30 heating degree days (HDD) from its forecast. The American GFS still advertises a strong cold shot into the northern United States for the middle of the week, but it locked onto a milder break for Dec. 13-15 and also wasn't as cold across the northern United States Dec. 17-20, NatGasWeather said.
“It's still chilly Dec. 17-19 with above-normal HDDs, just not nearly as ominous.” Although the models are much closer than they had been, the GFS remained “a little chillier Dec. 15-19,” the forecaster said.
Nevertheless, the expected spike in demand should significantly increase storage withdrawals. The market on Friday continued to digest the modest 19 Bcf withdrawal reported by the U.S. Energy Information Administration (EIA) the previous day, with some analysts projecting a much lower draw and others expecting a much larger one.
The EIA figure caused the year/year surplus to balloon out to nearly 600 Bcf, a barrier not crossed since June 2016, according to Mobius Risk Group. Interestingly, the market is pricing as if risks of a 2016 repeat are a foregone conclusion.
“It is important to keep in mind that more and more of the ‘excess’ gas is being produced in Appalachia and backing up supply in Upper Midwest and Northeast storage facilities,” Mobius said. Thursday’s EIA inventory data “was a prime example of this trend” as the two regions collectively withdrew 15 Bcf, which compared with the draw of 36 Bcf recorded in the same week last year.
Early indications for the next EIA report are for a withdrawal near the 80 Bcf mark. If that figure were to hold true, it would be the first time in four weeks that the year/year surplus would shrink, Mobius noted.
Analysts with Tudor, Pickering, Holt & Co. (TPH), which on Thursday said supply would have to decline in 2020 to balance the oversupplied market, said the task would be made easier if there were no further production growth into year end.
“But the trend is not our friend as dry gas production averaged around 96 Bcf/d” during the week of Thanksgiving, up around 3 Bcf/d in the last 10 weeks, according to TPH. “As a result, the oversupply has become more acute and, on a weather-adjusted basis, Thursday’s reported 19 Bcf draw implies an oversupply of 4.5 Bcf/d.”
Weather is doing its part as degree days have been 13% above the five-year average this withdrawal season, and flow data indicates a 5 Bcf/d increase in residential/commercial week/week. This “should drive a much larger draw” in the next EIA storage report, with the firm’s early estimate indicating a print in the 70 Bcf range.
Also supporting the demand picture is an increasing pull from the Cameron liquefied natural gas (LNG) terminal, “which hit a record high of 0.8 Bcf/d” during the first week of December as the second production unit reached the final commissioning stages with the introduction of feed gas.
Meanwhile, McDermott International Inc., the engineering, procurement and construction (EPC) contractor for the first three production units at Freeport LNG, said Friday the second train had begun producing LNG. The company is constructing the Texas project with Japan's Chiyoda International Corp. and privately held Zachry Group.
The second and third trains remain on schedule, with Train 3’s initial production likely before the end of March. Freeport has also secured the financing for a proposed fourth train to add more than 5 million metric tons/year (mmty) to the existing project, increasing total export capability to more than 20 mmty. KBR Inc. is EPC contractor for the fourth train.
Lower Spot Gas
The core of the winter season is still weeks away, but downright tropical weather conditions expected across much of the United States sent spot gas prices lower on Friday.
Some of the most significant losses were in the Northeast, where Mother Nature was expected to unload everything but the kitchen sink over the next several days. A surge of warm air was forecast to hit the region beginning over the weekend, lifting daytime highs into the 50s, but by Wednesday, a rapid freeze-up in expected, according to AccuWeather.
“Since the storm will be weak rather than strong, it's possible that a secondary storm may develop along the push of frigid air,” AccuWeather chief broadcast meteorologist Bernie Rayno said. “I am pretty convinced that a storm is going to form along this boundary, between warmer air in place and colder air surging, into the Carolinas Tuesday night.”
The question then becomes whether the storm goes out to sea and takes the cold front blasts along with it, or does the storm have enough strength because of all of the energy associated with the jet stream that the storm strengthens?
“If it does, it won’t go out to sea. It will come up the coast. If the storm does strengthen, you’ve got to worry about a snowstorm,” Rayno said.
With several days of mild temperatures until then, Northeast spot gas prices crashed by the double-digits. Tenn Zone 6 200L tumbled 15.5 cents to $4.340. Transco Zone 6 non-NY plunged 24.5 cents to $2.125.
Losses across Appalachia were similarly stout, with Tennessee Zone 4 Marcellus giving up 24.0 cents to average $1.610.
On the pipeline front, Texas Eastern Transmission (Tetco) from Saturday (Dec. 7) through Dec. 14 plans to conduct an outage on its Somerset, OH, compressor station on the 24-inch diameter line. Capacity from Sarahsville to Lebanon would be reduced by 117 MMcf/d, but flows will be curtailed by as much as around 190 MMcf/d based on 30-day max flows through the line, according to Genscape Inc.
“This line has been subject to several rounds of maintenance over the last few months,” Genscape Inc. analyst Josh Garcia said. “With the 30-inch line and the Penn-Jersey Line also currently going through outages, three out of four of M2’s export lines are constrained (counting the Northern and Southern M3 lines as separate lines), which adds more bearish pressure on M2 prices.”
Interestingly, it was Texas Eastern M-3, Delivery that posted much stronger decreases as spot gas tumbled 35.5 cents to $2.085.
Cash prices across the country’s midsection were down as much as a dime, including much of Texas. The exception was in the western part of the state, where El Paso Permian cash tumbled 20.5 cents to $1.290. Other pricing hubs in the region put up similar declines.
After posting some of the largest day/day moves throughout the week, most western pricing hubs saw more muted action on Friday. Opal was down only 4.0 cents to $2.625, while Malin rose a half-cent to $2.700.
The more volatile SoCal Citygate, however, plunged 53.5 cents to $4.270, though it remained one of the highest-priced hubs in the country outside of the Northeast.