With January projected to be one of the Top-10 warmest on record, the double-digit decreases in bidweek prices reflect just how much things can change in a year. NGI’s January BidweekNational Avg. dropped 26.0 cents to $2.565.
A similarly mild weather outlook sent January 2019 bidweek prices tumbling as well, but this January’s prices came in about $1.75 lower as the 600 Bcf-plus storage deficit the market faced a year ago has been erased. However, the January bidweek average did come in about 41 cents above the $2.158 price of the January Nymex contract upon expiration.
Storage inventories as of Dec. 20 sat at a massive 518 Bcf surplus to year-ago levels and just 69 Bcf below the five-year average of 3,319 Bcf, according to the U.S. Energy Information Administration (EIA). Stocks are poised to grow even further as long-range weather outlooks maintain a pattern where any cooler troughs drop into lower demand markets in the West.
With a total lack of blocking on the Atlantic side, the response is warm ridging much more often than not in the eastern half of the nation, according to Bespoke Weather Services. Based on the current forecast, the firm now projects January to be “another Top 10 warm month, and that even assumes normal beyond Day 15, so there is room to climb the charts more if this pattern doesn’t change.
“We did see such a change last January after a warm first half, but so far see no clear signs of a repeat.”
NatGasWeather continues to look around Jan. 17-20 for a pattern change as very cold air is forecast to be over Western Canada that has the potential to release and spread into the United States. However, the weather data has yet to show this as a high probability of occurring, so the firm is waiting to see if weather data starts to show the colder air pushing farther south.
There is some hope for a recovery, however. Taking a look at the monthly changes in the Nymex front-month contract in January for the past five years, prices moved at least 10% from year-end to mid-January, according to EBW Analytics Group.
“In January 2018 and 2019, gas skyrocketed by more than 20% before receding,” the firm said. “Should weather forecasts turn colder and spur short-covering, a similar outcome may be in store this year.”
However, the front-month contract posted declines by the end of the month in four of the five past Januaries, EBW noted. On average, prices posted a 5% increase by mid-January before stumbling to a net 5% decline by the end of the month.
“In 2020, even if prices do briefly surge higher, an oversupplied seasonal outlook appears likely to reverse any short-term gains for natural gas,” the firm said.
However, there are other factors that could influence prices. The active rig count remains a strong signal of the overall health of the oil and gas industry in the United States, according to analytics firm Enverus.
In addition to lower commodity prices, the new mantra from investors of “free cash flow” and the resulting push to generate investor returns by focusing on capital efficiency has urged more operators to do more with less and pull back on production volume growth, the firm said.
Rig count data has reflected this trend, steadily declining since 4Q2018, when the United States had the most active rigs since the lowest point in 2Q2016, according to Enverus. “The U.S. rig count is currently sitting at levels last seen during 1Q2017.”
The Anadarko Basin continues to lead the drop with more than 60% fewer rigs in 4Q2019 compared to 3Q2019, according to the firm. In percentage terms, other basins posting a large drop in active rigs include the Denver-Julesburg Basin (at nearly 50%), Appalachia and the Gulf Coast, including the Eagle Ford.
“However, no major basin remains at 4Q2018 rig count levels, and even the Permian has dropped,” Enverus said.
In its most recent Drilling Productivity Report, the EIA said total oil and natural gas production from seven of the most prolific U.S. onshore unconventional plays continues to increase, but for a second consecutive month will grow by less than 1% in January.
EIA expects increases in five of the seven plays, including the Permian Basin with a forecasted 17.08 Bcf/d, up from 16.86 Bcf/d in December. EIA also expects increases in the Haynesville (12.09 Bcf/d from 11.96 Bcf/d) and the Niobrara (5.59 Bcf/d from 5.58 Bcf/d), along with a marginal increase in the Bakken (3.12 Bcf/d). Month-to-month decreases in gas production are expected in the Appalachian Basin (33.43 Bcf/d in January, compared with 33.51 Bcf/d in December) and the Eagle Ford Shale (6.76 Bcf/d from 6.84 Bcf/d).
In 2020, Enverus expects to see continued crude production growth in the Permian as operators push drilling efficiencies and take advantage of spare pipeline takeaway capacity. However, it anticipates a slowdown in gas production growth, “because the Permian is bottlenecked today, and another takeaway gas pipeline is not expected to begin service until 1Q2021.”
However, just because producers have pledged greater fiscal responsibility and indicated they won’t add rigs in 2020 if commodity prices rise, they may not have to, according to NGI’s Patrick Rau, director of strategy and research. A significant backlog of drilled but uncompleted wells (DUC) could come online to grow production even without new rigs.
This is especially true in the Haynesville Shale, Permian and Midcontinent. “That could help cap any price rally, or at least help keep them in check, everything else being equal,” Rau said.
Raymond James & Associates Inc. in December said onshore completion activity “is at an all-time high” even as the rig count has fallen, leading to a huge disconnect that may not be sustained through 2020. “As a result, operators are going to naturally require more inventory to continue running efficiently at an expanded pace.”
The firm sees DUC reaching “critical levels” by February, at which point frack crews will need to be idled or dropped as there “simply won't be enough slack (DUCs) to operate at today's rapid pace, supporting our below-consensus oil growth forecast next year.”
Although it’s been a rather mild winter so far across most of the United States, winter storms have wreaked havoc on the West, driving up demand and leading to extreme volatility in the region.
The flurry of storms shows no signs of slowing down in the new year. One storm in particular is likely to pack a significant punch Friday night through Saturday, according to AccuWeather. The “powerhouse storm” will be the third to strike the region in as many days, following one storm that lasted into New Year's Day and another expected to move in late Thursday.
Wind gusts that could exceed hurricane force, 74 mph or more, are possible and more than a foot of snow is likely in the Cascade Mountains.
“By Saturday, high winds will shift eastward to include all of Washington east of the Cascades, as well as northern Idaho and Montana,” AccuWeather senior meteorologist Brian Thompson said.
The region is expected to have little respite from unsettled weather as yet another storm will swing in on Sunday with several more to follow during the first full week of January, according to the forecaster.
Despite the messy weather pattern to start the new year, January bidweek prices across the region posted large declines month/month. In the Rockies, Cheyenne Hub plunged 48.5 cents to average $1.840.
A much larger decline was seen at Northwest Sumas, where January bidweek prices tumbled $2.915 to $3.725. The dramatic selloff occurred as import restrictions that had been in place for more than a year following an explosion on Westcoast Transmission were finally lifted.
The approval by the Canada Energy Regulator (CER) ends a safety restriction that cut the pipeline’s operating pressure, disrupting supplies and prices along the Pacific coast of the United States and BC since the blast on Oct. 9, 2018.
Westcoast deliveries to the U.S. Pacific Northwest shrank by an estimated 200 MMcf/d and resulted in extreme volatility at Northwest Sumas during times of strong demand. The BC supply loss fueled the sharpest American spot price spike recorded in five years by NGI -- $161.330/MMBtu on March 1 at the Sumas border crossing into Washington.
Upstream in the Permian Basin, Waha January bidweek prices were down 31.5 cents month/month to $1.090, although transactions were seen as low as 85.0 cents.
Although January prices averaged well above zero, Permian Basin cash prices during the final full week of 2019 returned to negative territory for the first time since last August as weak demand and ample supply weighed on the market.
Farther east, prices across Appalachia were down between 20 and 30 cents, although a few pricing hubs notched slightly more pronounced declines.
The Northeast was the only region to post widespread gains as the timing of a winter storm gave traders some caution during bidweek trading. The first half and last half of this “dynamic storm” will be like night and day in terms of weather and precipitation type for many locations, according to AccuWeather.
Aside from a brief period of freezing rain in portions of northeastern New York state and central New England at the storm’s onset, precipitation was expected to begin as rainfall with mild conditions entrenched across much of the Northeast. The second half of the storm was forecast to be colder and more “wintry” and responsible for snow of some sort in many areas of the Northeast.
It’s possible that precipitation may hold off until the storm is ready to bring pure snow to northern New England later this weekend, according to AccuWeather. “The amount of snowfall from Washington, DC, to New York City and Boston is not yet set in stone, but much of this swath is likely to at least have some snow mixing in at the end of the storm during Saturday night and Sunday.”
There is an increasing potential for accumulating snow from the northern suburbs of Philadelphia to New York City and the potential for accumulating snow on roads north and west of New York City to Boston. Long Island, NY, may also pick up an inch or two of slushy snow, according to the forecaster.
“How much snow accumulates will depend on how quickly colder air reaches the coast and causes rain to become mixed with and change to snow,” AccuWeather senior meteorologist Brett Anderson said.