• Natural gas futures trim earlier gains as weather model volatility increases
  • Production still well off highs, while liquefied natural gas demand sets another record
  • Cash prices up slightly, but Permian Basin pricing approaches negative territory

Natural gas futures staged a modest recovery Monday as long-range weather outlooks once again hinted at cold returning. With model volatility picking up in recent runs, however, the February gas futures contract climbed just nine-tenths of a cent to $1.902. March climbed eight-tenths of a cent to $1.878.

Spot gas prices also put up small gains Monday as several weather systems were forecast to impact the United States over the next several days, though none of them was expected to bring frigid air that would induce strong demand. The NGI Spot Gas National Avg. rose 3.5 cents to $1.755.

With the winter so far lacking truly intimidating, lasting cold weather, natural gas futures have struggled to retain market value, with the front of the Nymex curve plunging below $2 on Jan. 21 and not looking back since.

Ample supplies and little indication of widespread Arctic air in the coming weeks led money managers to increase their bearish natural gas bets by 22,362 net-short positions to 247,520, according to the latest Commodity Futures Trading Commission data. The net-short position was the most bearish on record in data going back to May 2013.

Natural gas has a history of expanding beyond defined support and resistance areas, Enverus analysts noted. “Currently, the market is oversold and setting up for some sort of counter-trend rally.”

The gap from last week between $1.980 and $1.994 is the first target for prices to seek, the firm said. The short position from the speculative element may well bring significant volatility to the trade should prices garner any strength. Further declines will run into buying at the 2016 lows of $1.61-$1.87.

Any rally has proven difficult to get off the ground as weather forecasts continue to point toward a mild end to January and early February. The Global Forecast System model trended milder for the period through Feb. 4 in its midday run, but then was colder Feb. 5-9 by favoring several cold shots into the northern United States, according to NatGasWeather.

The European model, which had added the most demand over the weekend, was significantly warmer overnight Sunday and remained the warmer of the two models on a gas-weighted degree-day basis, Bespoke Weather Services said. In fact, the afternoon run of the European data slashed even more demand from the outlook.

Some model runs have shown a weakening of the positive Eastern Pacific Oscillation (EPO) pattern, which would open the door to getting some cold into the pattern, but currently there is not much consistency in this idea, according to Bespoke.

With February gas prices lingering below $2 for five days now, the prospect of a significant rally diminishes as the winter wears on, according to analytics firm Powerhouse.

This is especially true as the storage overhang has continued to mount. Last Thursday, the Energy Information Administration (EIA) said that inventories as of Jan. 17 stood at 2,947 Bcf, which is 554 Bcf higher than last year at this time and 251 Bcf above the five-year average of 2,696 Bcf.

Looking ahead to this week’s EIA report, early estimates are pointing to a withdrawal in the mid- to upper 190s Bcf, which would compare to last year’s 171 Bcf draw and the five-year average 143 Bcf pull.

Powerhouse noted that the average rate of withdrawal from storage is 22% lower than the five-year average so far in the withdrawal season. Even if the rate of withdrawal from storage matched the five-year average of 13.5 Bcf/d for the remainder of the withdrawal season, total inventory would be 1,948 Bcf on March 31, which is still 251 Bcf higher than the five-year average of 1,697 Bcf.

Bulls have a couple factors working in their favor, however. Production on Sunday sat below 92 Bcf, which is still a little more than 4 Bcf off the highs set in November, according to Bespoke. Liquefied natural gas (LNG) hit new record highs over the weekend and remained just shy of 9.5 Bcf on Monday, NGI’s U.S. LNG Export Tracker showed.

“Weather trends are the key here,” Bespoke said. “If a colder move is real, we can rally at least to $2.00, but a failure would send us back toward the lows.”

Waha Barely Above Water

Spot gas prices were slightly higher Monday as rain and snow were expected to accompany multiple weather systems that were forecast for the country this week. One system was forecast to bring snow showers and cool temperatures to the Great Lakes and Northeast Monday, but with highs mostly in the 30s and 40s, according to NatGasWeather.

A milder system was expected across the Southeast, while a third system was to hit the West, but also with limited subfreezing air as the frigid cold pool retreats into Canada and out of the reach of U.S. weather systems, the forecaster said. Additional systems were forecast to follow across the western and southern United States during the second half of the week, “but again rather mild for late January.”

Gains of less than a dime were seen throughout most of the country, but losses in the Permian Basin threatened to pull prices into negative territory again.

Waha next-day gas plunged 37.5 cents to average just 33.5 cents, and some deals priced as low as a nickel.

“There is still way too much supply and not enough takeaway capacity,” RBN Energy LLC analyst Jason Ferguson pointed out in a blog post earlier this month.

RBN data shows that since topping 12 Bcf/d routinely near the end of December, January natural gas production volumes in the Permian have averaged just below that at 11.80 Bcf/d.

“Despite the lower production, pipelines leaving the Permian remain mostly full,” Ferguson said.

The lack of adequate natural gas infrastructure in the Permian is no secret. Kinder Morgan Inc., which brought about some temporary price relief after bringing online the Gulf Coast Express pipeline, was slated to bring online its second Permian takeaway project, Permian Highway, later this year. However, management indicated last fall that it is now targeting a 2021 in-service, a time frame it stuck during the company’s fourth quarter 2019 earnings call last week. Another 2 Bc/d pipeline, Whistler, also is projected to begin operations in 2021.

Meanwhile, the lack of winter demand has resulted in cash prices falling back into negative territory in December, the first time since August that level had been reached.

This week could fare no better. Genscape Inc.’s demand projections continue to struggle to crest the 100 Bcf/d mark for this week. Lower 48 population-weighted heating degree days (HDD) are forecast to climb daily to a mid-week high of 20.3 HDDs by Wednesday. The firm’s daily supply and demand model similarly projects demand to rise to a peak at 99 Bcf/d by Wednesday.

Other pricing hubs across Texas climbed less than a dime. Katy rose 5.0 cents to $1.890.

Cash prices on the West Coast rose similarly, although a new maintenance event affecting one of Southern California Gas’ (SoCalGas) major import lines left its mark on SoCal Citygate.

An unplanned Safety Related Condition on Line 235-2, announced on Friday, required a cut of 170 MMcf/d to firm operating capacity for the Needles/Topock Area Zone, according to Genscape. The line had been flowing slightly above full, resulting in the difference between the operating capacity reduction (170 MMcf/d) and flow reduction (around 180 MMcf/d).

“Posted firm operating capacity for this Zone was 438 MMcf/d, and it averaged 450 MMcf/d in the 30 days before this reduction was announced, “ Genscape natural gas analyst Joseph Bernardi said. “The Zone had been flowing slightly above full since L235-2 had some of its throughput capacity restored in October 2019.”

In October 2017, a section of this same line exploded in the rural Mojave Desert. SoCalGas announced a force majeure as a result, which cut all Needles/Topock flow to zero for around 2.5 months.

“This was a major blow to SoCalGas’ import capacity: multiple lines had gone down for unplanned maintenance in fall 2017. For comparison, before being reduced to zero, this Zone’s total receipts were at about 800 MMcf/d,” Bernardi said.

Partial Zonal flow capacity of around 270 MMcf/d was restored in December 2017, but it was limited to that amount for nearly two years as a result of ongoing leak inspections and restoration work on L235-2, according to Genscape. When L235-2 regained some ability to flow in October 2019, the Area Zone’s receipts crept up to about 450 MMcf/d.

“This newest maintenance event essentially takes away that incremental flow capacity, returning the Area Zone’s firm operating capacity to 270 MMcf/d, Bernardi said.

The restriction boosted SoCal Citygate spot gas prices by nearly 50.0 cents to $3.110.

In the Rockies, Opal was up 4.5 cents to $1.725.

Similar increases were seen throughout the country’s midsection, while in Appalachia, Texas Eastern M-3, Delivery cash jumped 12.5 cents to $1.795.

In the Northeast, the slightly chilly outlook for the Northeast on Tuesday sent prices at Algonquin Citygate up 18.5 cents to $2.070. Transco Zone 6 non-NY rose 18.0 cents to $1.990.