After a promising start, natural gas futures ended the day lower Wednesday even as weather models turned chillier, adding demand to an otherwise bleak temperature outlook. The January Nymex gas futures contract fell 2.1 cents to settle at $2.243/MMBtu. February lost 2.0 cents to hit $2.243.
Spot gas prices were mixed as a strong cold snap was forecast to sweep across the Midwest and Northeast into Thursday, with crisper air also circulating through Texas and the South. Steep discounts in the Northeast, however, helped push the NGI Spot Gas National Avg. down 2.5 cents to $2.350.
While hopes are slim for a white Christmas, weather models are showing some cooler air and higher demand over the next 15 days. However, the Global Ensemble Forecast System (GEFS) once again made a much larger move than the European model overnight, adding a whopping 36 forecast gas-weighted degree days (GWDD), according to Bespoke Weather Services.
The midday run of the American weather model added even more demand to the outlook and was 50 heating degree days ahead of its European counterpart at midday.
The European data remains much more consistent, having added just three forecast GWDDs since Tuesday and maintaining the much milder outlook in its Wednesday afternoon run. Bespoke continues to favor the European model as the GEFS has shown that “it is simply unreliable” the last few weeks in this pattern, and again appears to be pushing more cold into the United States than what the pattern suggests should occur given the large trough in the Gulf of Alaska region, “a feature which typically helps keep colder air bottled up in Canada.”
Nevertheless, even in the European data, “we have stopped moving warmer for now, though the pattern out toward Christmas Day still doesn’t indicate an imminent turn back colder yet,” Bespoke chief meteorologist Brian Lovern said.
In addition to any significant weather changes that may lie ahead, Thursday’s government storage data could influence price behavior the rest of this week. Most estimates as of Wednesday pointed to a withdrawal in the 70s to low 80s Bcf range.
A Bloomberg survey of nine participants showed withdrawal projections in a tight range from 72 Bcf to 81 Bcf, with a median of 78 Bcf. A Reuters poll of 16 analysts pointed to a draw of 76 Bcf, although some estimates were seen as low as 62 Bcf. NGI expected to see a pull of 75 Bcf.
This would compare with last year’s 75 Bcf draw for the similar week and the 68 Bcf five-year average draw, according to the U.S. Energy Information Administration (EIA).
Last week, EIA reported a 19 Bcf draw from storage that left inventories as of Nov. 29 at 3,591 Bcf, 591 Bcf above year-ago levels and 9 Bcf below the five-year average.
The current fundamental outlook is very bearish on a seasonal basis, and may succeed in cracking support to open the way to another leg lower, according to EBW Analytics Group. In addition to the generally weak weather forecast, the winter holidays generally bring significantly reduced spot market demand, potentially foreshadowing further downward pressure.
“Over Christmas and New Year’s Eve, a significant holiday effect may weaken support and cut the legs out from any nascent rally,” the firm said.
That said, although weather volatility has been “off the charts” in recent weeks and models have coalesced on a warmer outcome in the near term, 10 days from now, the 11- to 15-day window will be focused on early January, with the potential for a significantly colder 16- to 30-day outlook that may be sufficient to bolster Nymex futures, according to EBW.
Numerous bullish indicators may further support any near-term rally, the firm said.
For one, the year/year storage comparison is likely to shave 150 Bcf in the three weeks from the EIA storage week ending Dec. 13 to the week ending Jan. 3.
Second, liquefied natural gas (LNG) feed gas deliveries eclipsed the 8.0 Bcf/d mark over the weekend to set a new record, as Freeport Train 2 continues start-up activities and Cameron saw record volumes ahead of its second production unit. Elba Island is also preparing to ship its first cargo.
“While recently overshadowed by cratering weather-driven demand, LNG is a bright spot for bulls. The market appears to have discounted all three LNG trains, and further progression toward full operations can be a bullish catalyst,” EBW said.
Meanwhile, production growth could be flattening. In its latest Short-Term Energy Outlook, the EIA said dry natural gas production is expected to remain strong through the end of 2019, reaching an average 92.1 Bcf/d for the year, a 10% increase from the 2018 average.
However, production will grow much less in 2020 because of the lag between changes in price and changes in future drilling activity, EIA said. Domestic production is expected to average 95.1 Bcf/d in 2020.
EBW shares widespread observations that natural gas production growth is likely to decelerate in 2020, but said EIA's outlook seems “far too aggressive, at least at its stated 2020 price target of $2.45/MMBtu. Instead, such a slowdown would occur only after producers are forced to sharply cut capital expenditures in the face of extremely dire price outlooks.
On Wednesday, Chevron Corp. announced it was doing just that in Appalachia. The producer said it was also evaluating “strategic alternatives” for its shale exploration and development plans in the region as well as for KM LNG, the proposed export project for Kitimat in British Columbia in which it has a 50% stake.
“With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term,” CEO Michael Wirth said.
Operators in Appalachia have been pulling back throughout the year on gas prices that have continued to remain low, while publicly traded producers have come under pressure from investors seeking better returns. As a result, the double-digit production growth that characterized the basin over the last decade has been expected to slow and increase at a more modest single-digit pace.
Spot gas prices were mixed across the country even as a frigid cold shot in the Midwest and interior Northeast strengthened demand in those regions, with temperatures dropping as low as minus 20 degrees, according to NatGasWeather.
“It’s chilly along the East Coast, just not nearly as cold as inland,” the forecaster said.
Furthermore, the bump in national demand is expected to be short lived as as high pressure is forecast to return across much of the southern and eastern United States this weekend, with highs expected to reach the upper 40s to 70s.
Texas Eastern Transmission (Tetco) released another update to its Operation Status Report late on Dec. 9. All segments for the outage from Delmont to Perulack received their reports ahead of the Dec. 10 and 13 deadlines, with verification digs identified and permitting underway for each segment between the compressors, according to Genscape Inc.
Further progress of work plans are expected by mid next week, and Genscape expects the corrosion-related constraints on the Penn-Jersey Line to remain in place at least until then.
“The pipeline did not give more detail on the extent of the additional work plans, and it is currently unknown how much longer the capacity constraints will be in place or if additional constraints will be enacted,” Genscape analyst Josh Garcia said. “On the other hand, none of the other corrosion investigations elsewhere on Tetco have so far necessitated longer or additional capacity restrictions.”
A swing back to strong demand is expected Monday to Wednesday as a fresh cold shot tracks across the northern and central United States. It’s this northern cold shot next week where numerous heating degree days have been added in the latest weather models.
“But this is also where big model differences show up” as the Global Forecast System trended further colder by seeing a tight ball of frigid cold dropping into the northern Plains, then fanning it out afterward. “The European model keeps this frigid cold ball well north of the United States and why it’s not as cold for next week,” NatGasWeather said.
Dominion Energy Cove Point spot gas also tumbled, shedding 34.5 cents day/day to average $2.850. The drop comes as feed gas deliveries to the Lusby, MD, terminal fell nearly 32,000 Dth day/day, according to NGI’s U.S. LNG Export Tracker.
Louisiana pricing hubs rose anywhere from a few pennies to as much as 12 cents. Tennessee Line 800 moved up 8.5 cents to $2.180.
Midwest cash was modestly higher, with Chicago Citygate picking up a half-cent to hit $2.125.
NGPL Midcontinent was the lone pricing hub in the Midcontinent to end the day on the positive side of the ledger, climbing 16.0 cents to $1.550.
In West Texas, El Paso Permian spot gas climbed 11.0 cents to average $1.520.
Mexican pipeline company Fermaca announced this week that its La Laguna-Aguascalientes (LL-AGC) natural gas pipeline started commercial operations. LL-AGC is the central leg of Fermaca’s Wahalajara project, a system that will ultimately connect Permian supply to demand centers and pipelines in central Mexico.
Genscape does not expect LL-AGC to move substantial volumes until Wahalajara’s southern leg, the Villa de Reyes-Aguascalientes-Guadalajara line, comes online in the first half of 2020.
“That said, Waha basis did strengthen in Tuesday’s trading per NGI price data, adding16 cents to reach a 28-day high of minus 75 cents,” Genscape senior natural gas analyst Rick Margolin said.
On Wednesday, Waha basis held relatively steady, sitting 76 cents back of benchmark Henry Hub as cash prices rose to $1.500.