• January Nymex futures down 10.2 cents to $2.232; February down 8.5 cents to $2.234
  • “The GFS still hasn’t added enough demand back to fix the damage done by the loss of more than 55 HDDs going back to midday Friday”: NatGasWeather
  • “Funds are very short. The way I calculate it, they’re as short as they’ve been in at least five years”: INTL FCStone’s Saal
  • Freeport LNG announces start of commercial operations at Train 1

Natural gas futures gapped lower Monday after weekend forecasts erased December cold from the outlook, further pressuring a market needing robust winter demand to bring it closer to balance. After opening more than a dime below Friday’s settle price, the January Nymex contract went on to settle at $2.232/MMBtu, down 10.2 cents. The February contract settled at $2.234, off 8.5 cents.

In the spot market, mild temperatures and heavy discounts in New England led prices lower on the day, although forecasts and analyst projections pointed to higher demand later this week; NGI’s Spot Gas National Avg. dropped 12.0 cents to $2.155.

Weekend guidance advertised a pattern that would limit the amount of cold reaching key markets over the next 15 days. Subsequent data during the trading day shifted colder but not enough to alter the bearish outlook that had taken hold in the market.

The latest Global Forecast System (GFS) data as of midday Monday added projected heating degree days (HDD) compared to 24 hours earlier because of colder trends for the northern United States late this weekend through Dec. 23, according to NatGasWeather.

“But even after colder trends, the GFS still hasn’t added enough demand back to fix the damage done by the loss of more than 55 HDDs going back to midday Friday,” the forecaster said. “It also doesn’t help that the European model remains much warmer than the GFS and maintains a rather bearish pattern the next 15 days.

“It’s also important to consider that since the GFS misled the natural gas markets on two major polar outbreaks the past two weeks that turned into busts, we expect the European model would need to be fully on board” to overcome skepticism associated with any colder GFS projections.

Monday’s sell-off comes as the latest Commodity Futures Trading Commission (CFTC) data shows a historically large net short position for speculators.

The net short position for non-commercial speculators as a group grew by 42,397 contracts week/week, while commercial hedgers increased their net long position by 43,698 contracts, according to INTL FCStone Financial Inc. Senior Vice President Tom Saal’s breakout of the latest CFTC data.

Speculators grew their net short position to 166,826 contracts overall, their largest net short position since at least January 2014, according to Saal’s breakout, which reflects the Nymex NG (physical futures) and NN (swap futures) positions as of last Tuesday.

“Funds are very short,” Saal told NGI. “The way I calculate it, they’re as short as they’ve been in at least five years.” Looking at Monday’s sell-off, it’s possible that “additional shorts are coming in and pushing it down even more.”

Speculators appear to be placing their bets on temperatures staying on the mild side, but this could prove a risky strategy in a market that can swing quickly at this point in the season based on changes in guidance, according to Saal.

“If the weather were to change tomorrow or the next day to below normal, that’s how quickly things can change in this market, especially this time of year,” Saal said. “It’s dandy as long as the forecast is accurate.”

An updated outlook on winter pricing from BofA Global Research analysts issued last week did not offer much encouragement for bulls. Prices could “briefly” crest $3 this winter, “but only if sustained cold weather brings salt stocks a lot lower. Even then, any upside may be capped by Appalachian coal prices, which are 40% lower year/year and set a soft ceiling on natural gas prices.

“Our $2.35/MMBtu 2020 average price forecast, above the value of a Jefferson $2 bill, embeds a slightly weaker forward balance,” the BofA analysts said. “Yet we see potential for brief periods of distressed summer pricing. If Europe fails to balance the global gas market next year” and it jeopardizes U.S. liquefied natural gas (LNG) exports, “summer U.S. natural gas prices may show a $1 handle.”

On the topic of LNG exports, Freeport LNG officially started commercial operations at its first liquefaction train over the weekend, the company said Monday. This marks the first of three planned trains at the facility on Quintana Island on the upper Texas coast.

Commissioning for Train 2 is ongoing, with commercial service slated for January. Construction is underway on the third train, which is expected to start commercial operations in May.

Freeport’s first three trains are expected to produce around 15 million metric tons/year (roughly 2 Bcf/d) of LNG. Freeport is contemplating a fourth train, and the developers are aiming to make a final investment decision during the first quarter.

Meanwhile, looking at the latest supply picture, Genscape Inc. estimates as of Monday pointed to a “modest retreat” in production and “lagging” Canadian imports.

“During the weekend, production rocked back a bit to average 93.5 Bcf/d, down from the previous week’s multiple days of 94 Bcf/d-plus prints and the prior weekend’s record-setting high of 94.782 Bcf/d,” Genscape senior natural gas analyst Rick Margolin said. “Production actually started retreating around last Wednesday, which may be partly a function of freeze-offs in the West and maintenance on some Eastern systems.

“Imports from Canada this winter-to-date have been averaging just 4.2 Bcf/d. While that is slightly ahead of last year’s winter-to-date average, it trails the average of the previous three winters-to-date by about 0.5 Bcf/d.”

Mild New England

With colder weather and stronger demand not expected until later in the week, New England spot price premiums evaporated Monday. Maxar’s Weather Desk predicted highs in the low 60s for Boston Tuesday, with temperatures averaging about 13 degrees warmer than normal. Similarly warmer-than-normal conditions were forecast further south along the East Coast, including in New York City, Philadelphia and Washington, DC.

Algonquin Citygate plummeted $1.835 Monday to average $2.460; Tenn Zone 6 200L tumbled $1.875 to $2.465.

Cold temperatures moving through the central and eastern parts of the Lower 48 should push aggregate U.S. demand above the 100 Bcf/d mark later this week, according to Genscape.

“Weather conditions will broadly be mild through Tuesday,” Margolin said. “Starting Wednesday, a cold front will spread from the Midwest into densely populated gas markets of the Northeast,” raising total Lower 48 population-weighted HDDs to around 23 HDDs, about 15% colder than normal.

In terms of daily supply and demand numbers, this translates into a projected peak of 108.6 Bcf/d for Wednesday, up from about 86.2 Bcf/d Monday, according to Genscape estimates.

“Pipelines have already begun reacting to the incoming weather by issuing operational restrictions on systems including ANR, Dominion, East Tennessee, Northern Natural and Transco,” Margolin said.

The National Weather Service (NWS) on Monday was calling for rain along the Interstate 95 corridor to change to snow overnight Tuesday into Wednesday morning.

“A front extending from the Upper Great Lakes southwestward to the Southern High Plains will merge with a front coming out of the Southern Rockies by Monday evening,” the NWS said. “The boundary will move eastward off the East Coast and the Gulf Coast by Wednesday. The system will produce snow over parts of the Upper Midwest that will end over the Upper Mississippi Valley by Monday evening and continue through Tuesday morning over the Upper Great Lakes.

“...The rain will change over to snow over parts of the Texas Panhandle overnight Monday that will expand into parts of the Lower Mississippi Valley by Tuesday morning,” the forecaster said. “As the front begins to move off the Northeast coast by Tuesday evening, rain will change over to snow from parts of Northern New England into parts of the Ohio/Tennessee Valleys. Overnight Tuesday into Wednesday morning, the area of rain changing to snow will move into the Interstate 95 corridor.”

Despite some unusually cold conditions expected in parts of the Midwest Tuesday, spot price hubs in the region eased lower compared to Friday’s deals. Chicago Citygate slid 3.0 cents to $2.125, while Emerson fell 5.5 cents to $2.165. In the Midcontinent, Northern Natural Ventura climbed 9.5 cents to $2.205.

Over on the West Coast, SoCal Citygate prices jumped higher Monday as Southern California Gas system demand was projected to ramp up with the start of the new work week. Demand was projected to climb to slightly under 3 million Dth/d by Tuesday, enough to force the supply-constrained utility to withdraw from storage to balance its system. By comparison, Sunday’s demand totaled 2.6 million Dth/d, according to the utility.

SoCal Citygate picked up 88.5 cents to $5.155, while SoCal Border Avg. added 7.0 cents to $2.780.