Natural gas forward markets started off the new year and a new decade with little celebration as weather data remained exceptionally bearish, setting the stage for already plump storage inventories to grow further. Led by steep declines in the Northeast, February prices averaged 16 cents lower for the Dec. 26-31 period, while the balance of winter (February-March) fell an average 12 cents, according to NGI’s Forward Look.
The double-digit decreases seen across the United States rounded out eight consecutive weeks in the red for forward markets, which continue to face bearish pressure, mainly from weather forecasts that persistently lack sustained cold for the winter. Although the Global Forecast System model and European datasets have made small changes on a daily basis, the consensus is that weather for the better part of January is forecast to be warmer than normal.
“It would take considerably colder trends for weather patterns to be considered anything but solidly bearish as warmer-than-normal conditions dominate much of the southern and eastern halves of the country the next two weeks, other than a cold shot across the central and northern United States” on Tuesday and Wednesday (Jan. 7-8), NatGasWeather said. However, the “cold shot isn't nearly as cold as the data had shown, as the amount of cold into the Midwest and Northeast is much less and also not as far south into the United States.”
The balmy outlook has caused considerable damage to Nymex futures. On New Year’s Eve, the February contract closed out 2019 at $2.189, up only fractionally from Monday’s settle. On Thursday, the first day of trading in the new year, the prompt month shed 6.7 cents to settle at $2.122.
Furthermore, the so-called “widowmaker” spread between the March and April contracts, which is considered an indicator of market sentiment toward end-of-winter storage inventories, contracted to a mere half-cent on Thursday, with both contracts settling slightly below $2.10.
As of Dec. 20, total working gas in storage sat at 3,250 Bcf, 518 Bcf higher than last year at this time and 69 Bcf below the five-year average of 3,319 Bcf, according to the U.S. Energy Information Administration (EIA). Although the EIA reported back-to-back triple-digit storage withdrawals in the last two inventory reports, the extended span of mild weather and weak holiday demand are expected to result in growth ahead for the year/year surplus.
Estimates preceding Friday’s EIA report, pushed back a day because of the New Year’s Day holiday, showed withdrawals generally ranging from the upper 50s to upper 70s Bcf, although estimates were seen as low as 25 Bcf. NGI projected a 49 Bcf withdrawal.
While much smaller than the previous two draws, the figure would easily surpass last year’s 24 Bcf withdrawal but still would come in shy of the 89 Bcf five-year average, according to EIA.
For now, a dip in Lower 48 could support prices. Data indicated that production remained well off the late-November highs and even showed a further 1 Bcf decline to 93.2 Bcf on Wednesday, according to Bespoke Weather Services. “Although, as we have stated in the past, we are always skeptical of data the first of a new month.”
Looking further into 2020, Genscape Inc.’s supply/demand model suggested that Calendar (Cal) Year 2020 prices are pointing to total supply exceeding 100 Bcf/d. Though the firm expects the rate of production growth to slow (and eventually flatline), “the year should still see more than 4.2 Bcf/d production compared to 2019,” Genscape senior natural gas analyst Rick Margolin said.
Meanwhile, liquefied natural gas (LNG) demand continues to float near its highs, and power burns that have been “solid” given lower demand and a holiday period, according to Bespoke.
“It’s definitely not a bearish picture on the balance side,” Bespoke chief meteorologist Brian Lovern said. “The problem continues to be that it is mid-winter, and warm weather wins these battles at this time of the year, and will again here as long as we stay this warm. Barring a shift back toward a normal regime, risk is that we ultimately continue grinding lower in prompt-month prices.”
As the year progresses, export demand and power burns could, at the very least, keep prices from bottoming out. Export demand is expected to run about 4.4 Bcf/d stronger than 2019, while power burn is projected to practically equal 2019, which is notable given summer 2019 was on the hotter end of the spectrum, and gas prices were frequently low enough to generate coal-to-gas switching, according to Genscape.
“When all supply and demand elements are combined, the market projects to run long to the tune of about 1.7 Bcf/d,”Margolin said. “While not as robust a surplus as Cal 2019 (2.4 Bcf/d), it is exponentially looser than the three years prior to 2019.”
Losses in the forward markets were widespread across the country for the Dec. 26-31 period, though none were as pronounced as in the Northeast. The region posted declines of nearly 90 cents at the front of the curve, with stout decreases seen through the rest of winter, according to Forward Look. Prices further out the forward curve shifted only a few cents on average.
The sharp drops in the East occurred despite a “two-faced storm” that was set to unload freezing rain and snow in the region later this week and through the weekend. There’s also a projected cold shot for Tuesday and Wednesday that forecasters continue to monitor, but the front isn’t as cold as weather data previously had shown, as the amount of cold into the Northeast is much less, according to NatGasWeather.
“Before and after this cold shot, strong high pressure will dominate” the South and East most days with temperatures in the 40s to 50s across the southern Great Lakes and Northeast, with 60s and 70s from Texas to the Mid-Atlantic Coast, which would be 10-30 degrees higher than normal, the forecaster said.
With only a brief move to the chilly side, forward prices across the Northeast tanked. In New England, Algonquin Citygate February prices tumbled 71 cents from Dec. 26-31 to reach $6.245, while the balance of winter slid 47 cents to $5.193, Forward Look data show. Summer 2020 prices were down only a penny to $2.33, and the winter 2020-2021 strip slipped 2 cents to $6.41.
At Transco Zone 6 non-NY, February was down 40 cents to $3.293, and the balance of winter was down 26 cents to $2.774. The summer fell 1 cent to $1.96, while next winter rose 2 cents to $3.73.
In Appalachia, Texas Eastern M-3 posted the region’s largest fall as a critical outage on the Texas Gas Transmission pipeline was lifted.
“Texas Eastern’s Line 12 outage from Delmont to Perulack in M3 is effectively over,” Genscape analyst Josh Garcia said. “Normal capacity has been restored through the line, relieving the bullish pressure on M3 prices that have been present so far this winter.”
The main issues affecting Line 12 were resolved on Dec. 28, but full capacity was not restored until New Year’s Day, when the additional preventative outage on the Entriken compressor was lifted, two days earlier than expected.
“As of now, the only remaining outage on the Penn-Jersey Line is between Bechtelsville and Lambertville, cutting 140 MMcf/d of operational capacity, with updates expected mid- to late next week,” Garcia said.
Texas Eastern M-3 February prices plunged 52 cents from Dec. 26-31 to reach $3.513, and the balance of winter dropped 33 cents to $2.929. Both the summer 2020 strip and the winter 2020-2021 strip held generally steady at $1.94 and $3.76, respectively.
The majority of pricing hubs throughout the country followed the lead of Nymex futures, with losses capped at around 20 cents for the rest of winter and at around a nickel for the summer 2020 strip.
This was also the case farther west in the Permian Basin, where cash prices fell below zero in the final week of 2019.
Waha February prices averaged 96.5 cents after falling 16 cents from Dec. 26-31, according to Forward Look. The balance of winter slipped 13 cents to 67.5 cents, while the summer dropped 4 cents to average 65 cents. Next winter was priced at $1.39 after failing to budge through the week.