- Latest weather data sees cold returning, drives up natural gas futures
- Coronavirus taking a toll on crude oil prices, impacting gas production forecasts
- Houston Ship Channel cash basis tightening as Freeport LNG terminal ramps up
With tight supply/demand balances intact, natural gas futures posted a moderate gain Tuesday as a return to at least near-normal temperatures appears more likely by the middle of the month. The March Nymex gas futures contract settled near session highs at $1.872, up 5.3 cents. April climbed 4.0 cents to $1.902.
Spot gas prices also strengthened with the arrival of yet another brief cold blast in the central United States. The NGI Spot Gas National Avg. rose 10.0 cents to $1.815.
There’s still plenty of mild weather ahead over the next couple of weeks, but the latest Global Forecast System model turned colder at the end of the run, likely providing some support to a market that has continued to sink to multi-year lows in recent weeks. The model added 7 heating degree days (HDD) compared to the overnight run, but continued to stall the arrival of cold air into the Great Lakes and Northeast by another day and not until Feb. 16-19, according to NatGasWeather.
“What could be most important is it does show the set-up to be rather cold Feb. 18-19, just a day later,” the firm said. With prices closing near session highs, it appears the market was satisfied in the weather data, “or they view the balance as tight enough regardless of weather.”
To be sure, balance data remains “impressively tight,” as it should with such a low price environment, according to Bespoke Weather Services. Preliminary data showed yet another drop in production, slightly under 91 Bcf, and more than 5 Bcf off the late-November high.
However, while much of the recent production decline is likely tied to temporary pipeline maintenance or freeze-offs, a much more structural decline could lie ahead. The recent collapse of oil prices is generating substantial reductions to Genscape Inc.’s gas production forecast.
In early January, the West Texas Intermediate (WTI) benchmark price had topped $65/bbl. Since then, the price has plummeted, with trading on Monday slipping below the $50/bbl mark for the first time in 13 months. The March contract settled then Tuesday at $49.61/bbl.
“This leads to a significant reduction in our production outlooks for oil and gas by causing rig counts to decline much faster than efficiency gains can compensate for,” Genscape senior natural gas analyst Rick Margolin said.
On Monday, the firm’s latest major production forecast update included a nearly 1.4 Bcf/d production growth curtailment for 2020 compared to the firm’s previous forecast update six weeks ago. Production expectations for 2021 were reduced by more than 2.3 Bcf/d versus the previous forecast.
“As a result, 2021 production is now expected to post a year-on-year decline,” Margolin said.
As for liquefied natural gas (LNG) demand and power burns, both looked similar day/day, but given the bearish shape of the forward curve, “it is clear that the market is very concerned about LNG shut-ins showing up later this year thanks to a massive global supply glut,” Bespoke said.
Meanwhile, the coronavirus outbreak in China, the main cause of the recent collapse in oil prices, has exacerbated supply concerns, with reports of the first diversion of an LNG cargo from China and some of the country’s largest LNG importers considering declaring forces majeure to manage oversupply.
While it may be too early to say with certainty how the rest of 2020 will shape up for the gas market, a look at the futures curve fails to paint a positive picture. The balance of 2020 (March-December) is trading about 30 cents below where the balance of 2016 was trading in February of that year, according to Mobius Risk Group. 2016 was also remarkably warm, and as a result, end-of-March storage inventories finished near 2.5 Tcf.
“The 2019/2020 winter is not likely to end up as warm, statistically speaking, and more importantly inventory is unlikely to top 2 Tcf,” Mobius said. “However, until the production gap versus last year is closed, or until the year/year storage surplus is consistently eroded, the market will continue to be apathetic to upside price risks.”
Working gas in storage as of Jan. 24 stood at 2,746 Bcf, 524 Bcf higher than last year at this time and 193 Bcf above the five-year average of 2,553 Bcf.
Permian Leads Gains
Spot gas prices were higher across the country Tuesday as a strong cold shot was set to arrive midweek into the central United States with rain and snow. Although the blast is expected to moderate as it pushes eastward the next few days, it is expected to provide some uplift to national demand as cooler conditions arrive into the East, according to NatGasWeather.
Then, a reinforcing cold shot is forecast to sweep across the Northeast Friday-Saturday for the strongest day of demand for the next nine to 10 days, the forecaster said. Stronger cold shots are expected into the western United States and northern Plains Feb. 10-15 for regionally strong demand, but the South and East is favored again to be quite mild with highs of 50s to 70s.
The mix of chilly and mild conditions across the country kept gains at the majority of pricing hubs limited to few cents, although much stronger increases were seen in the Northeast and in parts of Texas.
In the Lone Star State, El Paso Permian next-day gas jumped 87.0 cents to average $1.370, in line with the rest of the region. Gains throughout the rest of the state were far more moderate. Houston Ship Channel climbed 4.0 cents to $1.835.
Benchmark Henry Hub cash rose just 1.5 cents to $1.855, with similarly minute increases seen across Louisiana and throughout the Southeast.
With Houston Ship Channel (HSC) sitting only 2 cents back of Henry, the market’s weakest days may be in the rearview mirror, according to RBN Energy LLC.
In a recent blog, RBN analyst Jason Ferguson explained that traditionally, Permian Basin supply has flowed into both the HSC market and into the Corpus Christi/Agua Dulce market. HSC typically sat at a premium to Henry Hub and did so throughout 2018, but it fell to a discount by last summer as a pipeline reversal on the Gulf South Pipeline resulted in incremental supply showing up at the hub.
The pipeline reversal was intended to serve Freeport LNG, but the gas was left without a demand “sink” as the export terminal was delayed from its original start date in late 2018 to the summer of 2019, Ferguson said. Then, Kinder Morgan Inc.’s Gulf Coast Express (GCX) went online, and although the pipeline terminates at Agua Dulce, its start-up significantly affected the supply-demand balance at HSC.
“That’s because prior to GCX coming online, a significant amount of natural gas had been flowing from the HSC market to the South Texas gas market,” Ferguson said. “That supply helped the South Texas market meet rising demand from Cheniere’s Corpus Christi LNG export facility as well as from the new export pipeline to Mexico, TC Energy’s Sur de Texas-Tuxpan that came online last year. The start-up of GCX slashed the need for gas moving from the Katy/Ship area to South Texas.”
The knock-on effect was that the HSC market suddenly had excess supply that it needed to move east toward Louisiana. To drive gas flows in that direction, it was necessary to keep HSC pricing at a meaningful discount to Henry Hub, according to Ferguson.
However, now that Freeport has ramped up intake and exports in recent weeks, it has been a boon for demand, and for HSC pricing. NGI’s U.S. LNG Export Tracker showed that total feed gas deliveries hit a record 9.3 Dth/d on Monday and then held at around 9.25 Bcf/d on Tuesday. Deliveries to Freeport were at around 1.16 Dth/d as of Tuesday.
“However, HSC may not be out of the woods for long,” Ferguson said. He noted that two Permian Basin gas pipelines are set to begin commercial operations in 2021, once again sending a flood of supply into the market.
Farther north in the Midwest, Chicago Citygate spot gas picked up a penny to average $1.735, while prices in Appalachia climbed no more than a nickel.
On the pipeline front, Tennessee Gas Pipeline on Monday posted a notice of an emergency repair at Station 315 Unit 2A, near Wellsboro, PA, because of a unit issue. Operational capacity through the segment was impacted by 140 MMcf/d as of Tuesday’s timely cycles, according to Genscape.
“However, recent flows have been well below the operating capacity of 1.93 Bcf/d, averaging 1.66 Bcf/d and maxing at 1.75 Bcf/d over the last 14 days,” Genscape analyst Josh Garcia said.
In the Northeast, the projected bump in demand sent cash prices up by the double digits in some areas. Algonquin Citygate jumped 25.5 cents to $2.200, while Transco Zone 6 NY climbed only 8.0 cents to $1.775.