Technical trading may have had a hand in sending natural gas futures sharply higher after the Christmas holiday. Despite a shift to the colder side in long-range weather outlooks, the intensity of Thursday’s rally indicated other factors may have been at play. The January Nymex gas futures contract surged 12.2 cents to settle Thursday at $2.294/MMBtu. February jumped 9.8 cents to $2.285.

Spot gas was mixed as Western markets put up notable gains, while Permian Basin prices once again neared zero. The NGI Spot Gas National Avg. ultimately dropped 10.5 cents to $2.025.

Weather models moved warmer yet again through the end of next week, but all models shifted colder in the 11- to 15-day period, “a little surprising given a continued tendency toward a positive Eastern Pacific Oscillation (EPO)/positive North Atlantic Oscillation (NAO) regime,” according to Bespoke Weather Services.

This gives the firm some pause, as this suggests that either the projected 11- to 15-day cold weakens again as it rolls into the six- to 10-day forecast, or the cold shot is real but just a narrow colder window in the sea of a warmer pattern type. Although Bespoke adjusted its forecast colder starting on Jan. 5, it did not move as cold as the current model consensus. Instead, the firm wants to see progression forward or more pronounced changes in the EPO/NAO configuration that would be more supportive of a material colder turn.

Nevertheless, it appeared that “the bears have decided to hibernate” on Thursday as the January Nymex contract settled near its intraday high, according to Mobius Risk Group. The impetus for this rally, as is often the case in the winter months, is the colder forecast for the Midwest and the East Coast.

While the contango between Henry Hub cash prices and the prompt month remains intact, the January/February Nymex spread has strengthened considerably, with prices for the two contracts essentially flat to one another. “If the weather forecasts continue to trend colder, cash at Henry Hub moving into January may show some backwardation,” Mobius said.

However, NatGasWeather said that although the projected cold shot around Jan. 6-8 is helping, there were likely other factors at play in Thursday’s rally. The firm pointed to the looming expiration of the January Nymex contract, with speculators still heavily short. Thursday’s rally also could be due to a technical or seasonal bounce, or from players expecting a bullish storage report miss since last week's Energy Information Administration (EIA) report suggested the supply/demand balance had tightened in recent weeks.

Estimates ahead of the EIA report, pushed back to 10:30 a.m. ET Friday due to the Christmas Day holiday, point to a withdrawal in the upper 140s Bcf. A preliminary Bloomberg survey, which showed withdrawals ranging from 139 Bcf to 155 Bcf, had a median estimate of 147 Bcf. A Reuters poll of 12 analysts estimated draws ranging from 136 Bcf to 164 Bcf, with a median of 148 Bcf. NGI projected a 158 Bcf pull.

Last year, the EIA recorded a 61 Bcf withdrawal for the similar week, while the five-year average withdrawal sits at 101 Bcf. Inventories as of Dec. 13 stood at 3,411 Bcf, 618 Bcf above year-ago levels and 9 Bcf below the five-year average.

Bespoke agreed the price swing higher may have been exaggerated by “typical noise as we get to expiration,” and the fact that the market remains heavily short. There are a couple of caution flags against the bullish case, however.

“One is that cash prices were very weak today, trading under $2.00 later in the session,” Bespoke chief meteorologist Brian Lovern said. “Yes, we still have a lot of holiday impact, but that’s still quite weak no matter how you cut it.”

The other caution flag lies in the weather pattern, as Bespoke is not convinced that the pattern will deliver enough cold to even get to normal once the days in the 11- to 15-day roll into the six-  to 10-day, “as the Pacific and Atlantic sides of the pattern still are more supportive for warmer risks versus anything colder.

“For these reasons, we feel there is risk of a pullback in prices once the smoke clears from January contract expiration.”

Hanging by a Thread

There were plenty of losses seen in the cash markets across the United States, but the dramatic move lower in West Texas was especially grim for Permian Basin producers.

After enjoying several weeks of relatively strong prices, the rug was pulled out from under cash markets on Thursday. Waha next-day gas plunged 54.5 cents to average just 27.0 cents, with deals seen as low as 10.0 cents.

Similarly stout decreases were seen throughout the region as a lack of downstream demand and a glut of associated gas from the crude oil-focused play weighed on the market.

Changes on the supply side could be afoot, however. While oil wells in the Permian are still highly productive, producers in the region (and everywhere else, for that matter) are being pressured by Wall Street to focus less on absolute productivity, and more on profitability and financial sustainability.

As a result, many producers in their earnings calls announced lower capital budgets for 2020 and scaled-back drilling plans. Furthermore, productivity improvements are having less of an impact than they did a couple of years ago when the basin was ramping up, meaning that lower producer activity will not be offset as much by increasing well results, according to RBN Energy.

“The cumulative effect of initial decline rates on all of the recently drilled wells in the Permian is huge, so you need to keep completing more and more wells to keep production numbers increasing,” RBN analyst John Zanner said.

The production treadmill that producers are on is getting faster as the proportion of new wells to legacy wells has increased, “and producers are having a harder time staying on it while keeping their investors happy,” according to RBN.

With the projected slowdown in crude oil drilling, associated gas growth is also set to ease. That could be supportive for gas prices in the Permian over the coming months since the next major gas pipeline is not expected to come online in the region until 2021.

Elsewhere across Texas, spot gas was mixed but day/day changes were relatively small at less than a dime.

On the pipeline front, U.S. exports to Mexico’s Sur de Texas-Tuxpan (SDT-Tux) pipeline are set to be cut to zero for a one-day planned maintenance event Jan. 14 on the Valley Crossing pipeline, the sole source of supply for the SDT-Tux system.

Since Sept. 17, when SDT-Tux came online, Valley Crossing has delivered an average 683 MMcf/d, with a peak of 887 MMcf/d registered on both Dec. 17 and 18, according to Genscape Inc. Over the past 30 days, volumes sent to SDT-Tux have averaged 768 MMcf/d.

“The impact to total U.S. exports, however, may be slightly smaller as some reroute optionality is available via the Los Ramones pipeline,” Genscape analyst Ricardo Falcon said.

Cash prices across Louisiana were mostly lower, but losses were capped at less than 10 cents. A similar trend played out in the Southeast, while in Appalachia, Texas Eastern M-3, Delivery tumbled a more substantial 22.5 cents to $1.935.

In a recent notice, Texas Eastern Transmission (Tetco) said its Delmont outage is set to be lifted on Dec. 28, with a full return to service expected after an additional Entriken outage, around Jan. 2. Based on the results of the in-line inspection tool run reports received in early December, Tetco determined that once remediation of certain anomalies are completed, Line 12 between Delmont and Perulack on the Penn-Jersey line would be fit for service and normal operating pressure could resume, according to Genscape.

“This will take several days as Line 12 is isolated from Lines 19, 27 and 28, and the current return date is targeted for Dec. 28,” Genscape natural gas analyst Josh Garcia said. “Capacity through Line 12 from Delmont to Perulack will be increased by roughly 85 MMcf/d, and was already 50 MMcf/d higher after the Perulack to Shermansdale outage was lifted late on Dec. 23.”

After the Delmont outage is lifted, Tetco is scheduled to immediately commence an outage on its Entriken compressor station to repair a separate issue. According to the pipeline, this would minimize the likelihood of an unplanned outage later this winter.

“This outage will take roughly five days, and its return to service is currently targeted for Jan. 2, 2020. Line 12 from Delmont to Perulack will only return to full capacity after the Entriken outage is lifted, increasing operational capacity through the line by roughly 430 MMcf/d,” Garcia said.

A status update for Line 19 between Bechtelsville and Lambertville is expected around Dec. 30, which will increase delivery capacity to the end of the line by roughly 150 MMcf/d, according to Genscape.

In the Northeast, spot gas fell hardest in New England as daytime temperatures in Boston were expected to flirt with 50 degrees on Friday. Algonquin Citygate plunged $1.040 to average $2.215.

Elsewhere in the region, Transco Zone 6 non-NY next-day gas averaged $1.955, down 17.0 cents on the day.

On the West Coast, SoCal Citygate cash shot up 26.0 cents to $5.860, while spot gas at Kern River in the Rockies rose 10.5 cents to $3.115.