Natural gas forward traders appear to be searching for a floor for prices during what is normally a much more supportive time of year for the market. January prices plunged an average 23 cents from Dec. 6-11, while February dropped 19 cents and the balance of winter (January-March) slid 18 cents, according to NGI’s Forward Look.
Prices further out the forward curve were not left unscathed, but losses were limited to a few cents at the majority of pricing hubs.
With weather model volatility remaining high over the last week, and the American data losing the confidence of the market with its erratic swings in recent runs, Nymex futures began crashing last Friday when the midday run of the Global Forecast System data erased a sizeable chunk of demand from its outlook.
The wild turn in the forecast sent the January contract tumbling around 9 cents and February down 8 cents on Friday. When traders returned from the weekend, even more demand was slashed from outlooks, leading to another significant move lower for futures.
The January Nymex contract ultimately dropped about 19 cents from Dec. 6 to settle Wednesday at $2.243. February was down about 16 cents to $2.243, and the balance of winter was down 15 cents to $2.23.
“Technical indicators suggest that natural gas may have found significant support around $2.19/MMBtu, leading to a critical period for Nymex futures,” EBW Analytics Group said.
The latest weather data is becoming more supportive, although the market will likely be cautious in how it approaches the data. The overnight European weather model ensembles shifted in favor of more blocking on the Atlantic side, keeping some colder air in place in parts of the East through the six- to 15-day outlook, with the best warming back over the central United States, according to Bespoke Weather Services.
“The forecast demand profile still is rather tame, averaging below-normal demand when totaling up the next 15 days, but is not as far below normal as it was,” Bespoke chief meteorologist Brian Lovern said.
The American Global Ensemble Forecast System remains around 28 gas-weighted degree days colder than the European model, as it not only shows the Atlantic blocking but also pushes some upper-level ridging up toward Alaska at times. “We do not trust that part, as we do not believe the Pacific side of the pattern can grow more supportive for cold until at least the very end of the month based on the current projected tropical forcing patterns,” Lovern said.
While demand has been steadily added for next week into the following week, the European model still forecasts a very warm U.S. pattern for Dec. 21-26, with above-normal conditions gaining across much of the country, according to NatGasWeather. This is especially bearish for the market given the slump in demand that typically accompanies holidays.
However, “if this Dec. 21-26 period were also to gain demand and look a bit colder in time, the natural gas markets would certainly notice,” NatGasWeather said.
On Thursday, all eyes were on the latest government storage data.
The U.S. Energy Information Administration (EIA) reported a 73 Bcf withdrawal from natural gas storage inventories for the week ending Dec. 6, a figure that came in slightly smaller than market expectations.
The reported draw also came in a couple ticks below the year-ago withdrawal of 75 Bcf, but it was several Bcf above the 68 Bcf five-year average pull, according to EIA.
Ahead of the EIA report, surveys showed estimates ranging from a withdrawal as little as 62 Bcf to one as large as 83 Bcf. NGI expected to see a pull of 75 Bcf.
Bespoke, which had estimated an 80 Bcf withdrawal, said it is possible that it did not give the holiday weekend enough credit for limiting the draw, as the latest number included the weekend after Thanksgiving. If that is not the case, however, the balance tightening is not as notable as the firm’s data has been indicating.
“Next week’s number will tell us much more, clear of any holiday, etc.,” Lovern said. “We currently have a 93 draw for next week, which still does look tighter, but if this winds up down into the 80s, that will confirm that balance tightening is overstated.”
Broken down by region, the Midwest posted the largest withdrawal of 27 Bcf, while the East drew down inventories by 24 Bcf, according to EIA. Pacific stocks were down by 10 Bcf, and the Mountain was down by 7 Bcf. The South Central region posted a net withdrawal of 6 Bcf, which included an 11 Bcf draw from nonsalt facilities and a 5 Bcf injection into salts.
Total working gas in storage as of Dec. 6 stood at 3,518 Bcf, 593 Bcf above last year at this time and 14 Bcf below the five-year average, according to EIA.
Traders appeared disappointed in the EIA data, with prices giving back some of its gains immediately after the report. However, after another shift to the chillier side in the midday run of the Global Forecast System (GFS), prices shot up as high as $2.348.
As for specifics, the GFS lost several heating degree days (HDD) for the Dec. 16-18 period, but trended notably colder for Dec. 20-24 by gaining numerous HDDs by favoring a second strong cold shot into the Midwest and Northeast, according to NatGasWeather.
“This makes the afternoon European model of considerable interest to see if it also trends colder,” the firm said. “The European model did gain 11 HDDs last night but maintained a rather bearish pattern Dec. 21-26 with warmer-than-normal conditions across most of the United States.”
The afternoon run of the European weather model gained another 5 HDDs on stronger cooling across the northeastern United States for next week into the following week. However, it still shows a rather bearish pattern Dec. 21-26 with warm high pressure building over much of the country, “just a little slower in doing so,” NatGasWeather said.
The January Nymex contract went on to settle Thursday at $2.328, up 8.5 cents day/day. February jumped 7.7 cents to $2.320.
Weather aside, there are several other bullish indicators that could support the market long term, according to EBW. Record feed gas deliveries to liquefied natural gas terminals, a projected tightening of year/year storage comparisons, slower production growth and near-record short positioning that may drive a wave of short-covering much like the market saw in September and early November.
Hedge fund incentives may also encourage closing of short positions between now and the end of 2019. “Many hedge funds close out their books ahead of the winter holidays, and traders who have profited from shorting natural gas throughout 2019 may wish to lock in profits and protect their bonuses,” EBW said.
Permian a Bright Spot
Although Permian Basin pricing weakened much like the rest of the United States, it was still the bright spot in the country as losses in the region were far less compared with those in other areas.
Cash has also been relatively strong in recent weeks, which is somewhat surprising given that prices enjoyed only a brief rally following the full in-service of the Gulf Coast Express pipeline before crumbling to a meager 5.0-cent average on Oct. 22, according to NGI historical data.
However, since then, prices have surged as high as $2.185 in early November and have consistently traded above $1 since Nov. 28.
As for forwards, Waha January prices slipped just 5 cents from Dec. 6-11 to reach $1.324, according to Forward Look. February and the balance of winter also lost a nickel each to average $1.132 and $1.020, respectively. Summer 2020 rose 2 pennies to average around 76 cents, while the winter 2020-2021 stayed flat at around $1.49.
Other points across Texas closely tracked Nymex futures, with double-digit losses through the winter and then smaller declines further out the curve.
Forward prices out West were harder hit even as a conveyor belt of storms was set to unleash unsettled weather conditions across the Pacific Northwest through next week, according to AccuWeather.
The systems were expected to bring rain and snow to the region throughout much of the week, but the exact amount of moisture associated with each weather system depends on whether high pressure sets up over the Great Basin, the forecaster said.
Regardless of the looming bump in demand, forward prices fell dramatically amid increased imports from western Canada and an improved storage situation in the region.
Northwest Sumas January prices plunged 26 cents from Dec. 6-11 to reach $3.429, while February slid 21 cents to $2.974 and the balance of winter dropped 19 cents to $2.856, Forward Look data show. Prices barely budged further out the curve.
The forward curve at SoCal Citygate posted similar decreases, while the losses in northern California were far more muted.
In the Midwest, Chicago Citygate forward prices were much lower despite the announcement by Indianapolis Power & Light (IPL) that it intends to retire its Petersburg 1 unit (282 MW) by 2021 and Petersburg 2 unit (523 MW) by 2023, citing challenged economics for coal versus gas and wind in the Midwest Independent System Operator (MISO) territory.
There is currently 765 MW of coal capacity scheduled for retirement in MISO in 2020, according to Genscape Inc. The IPL announcement raises MISO’s 2021 retirements schedule to 738 MW.
“Since 2016, IPL has retired 890 MW of coal generation while adding 1,301 MW of gas-fired generation,” Genscape senior natural gas analyst Rick Margolin said.
The company says it plans to reduce its coal portfolio to just 1,000 MW by 2024. If realized, that would represent a 60% reduction from 2014 levels, Margolin said.
“However, the Petersburg retirements may not be as bullish for gas as utilization rates have progressively declined at the units; the company is seeking to replace 200 MW of lost generation from renewables” and seeks to “implement energy conservation plans.”
Chicago Citygate January prices were down a whopping 27 cents from Dec. 6-11 to reach $2.408. February tumbled 24 cents to $2.405, and the balance of winter fell 22 cents to $2.335, according to Forward Look.
In the Northeast, prices along the Transcontinental Gas Pipe Line posted 60-cent-plus losses at the front of the curve amid the weaker demand picture for the region over the next couple of weeks. Transco Zone 6 NY January dropped 60 cents to $5.625, February slid 41 cents to $5.448 and the balance of winter lost 39 cents to reach $4.715.
In New England, Algonquin Citygate prices for January were down 68 cents to $6.908, while February was down 58 cents to $6.997 and the balance of winter was down 49 cents to $6.097.