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 on Dec. 6 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.
When traders returned from the Dec. 7-8 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.
Thursday’s weather data appeared to be more supportive as the European model ensembles shifted colder in back-to-back runs. However, all models overnight Thursday were significantly warmer, back to a full-on attack from milder Pacific flow, according to Bespoke Weather Services.
“It is interesting how all of the runs began to change by Days 4-5 toward more upper-level troughing in the Gulf of Alaska through Western Canada, indicating that something was picked up in the initialization of Thursday night’s runs that was not there at midday,” Bespoke chief meteorologist Brian Lovern said.
This lowers the firm’s confidence again somewhat, “as we need to make sure the next runs do not simply bend back the other way again,” Lovern said. As it stands now, the pattern is back easily on the warm side of normal overall, and “we still do not see any sign yet of a turn back materially colder, even in the pattern at the end of the 11- to 15-day.”
Specifically, the Global Forecast System (GFS) model lost 20 heating degree days (HDD), only to be outdone by the European model losing a heftier 27 HDDs shortly after, according to NatGasWeather. Both major weather models showed much less cold air into the northern United States throughout the coming 15-day forecast, but with the greatest demand losses occurring Dec. 20-26 as strong high pressure builds across most of the country in a very bearish set up.
“It’s possible the overnight weather data got too warm too quickly, but clearly the natural gas markets were hoping the GFS would finally be correct on its call for frigid cold after blowing it twice already this month,” NatGasWeather said. “So now it’s looking like a third time, as was the risk since the expectation was the GFS had been running too cold the past several days.”
Meanwhile, 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.
Genscape Inc. nailed the draw, although market consensus prior to the report had coalesced around a 76.5 Bcf withdrawal.
“This week’s report appears loose by approximately 2.7 Bcf/d to the five-year weather- and seasonally normalized average,” Genscape senior natural gas analyst Eric Fell said.
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.
Looking ahead to next week, Bespoke said should the current weather pattern verify, the market will retest $2.18-2.20. “The issue has been that models have been tough to trust, and we do still think there is risk to move colder toward the start of the new year.”
Longer term, there are several other bullish indicators that could support the market, according to EBW. Among those are 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.
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 given the increased flexibility in its supply stack, 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.