After taking a few steps back last week, natural gas futures moved more convincingly lower on Monday following further warming in the latest weather models. The March Nymex gas futures contract settled at $1.827/MMBtu, down 7.8 cents from Friday’s close. April dropped 7.4 cents to $1.843.
Spot gas prices also continued to retreat amid lingering mild temperatures ahead of the next winter storm set to move into the United States. NGI’s Spot Gas National Avg. fell 4.0 cents to $1.665.
After pointing toward a minor warmer change most of the weekend, Sunday night’s weather models moved significantly warmer as a positive Eastern Pacific Oscillation/Arctic Oscillation regime continues to dominate the pattern, according to Bespoke Weather Services. The firm, whose own forecast was already warmer than what models indicated on Friday, slashed another 10 gas-weighted degree days from its outlook.
“Models have continually struggled in this setup, consistently forecasting too much cold in the medium range,” Bespoke said. “We are again warmer than the model consensus in the 11- to 15-day timeframe in the eastern half of the nation for this same reason. There can be some occasional cold in parts of the interior west, although even there, we are not expecting to see strong cold.”
The timing of major weather features for the coming 15 days remains on track, as much of the country is expected to be mild early this week and then “rather chilly” Wednesday-Sunday, according to NatGasWeather. The firm said cold air is forecast to push initially into the west-central United States and then across the eastern half of the country for a surge in national demand and “where the data is still cold enough.
“However, mild high pressure is still expected to expand to cover most of the United States March 3-7 for a swing back to light national demand and where the pattern remains much too warm/bearish.”
With degree day norms starting to fall rapidly and no sign of sustained cold weather, prices are likely to continue trending lower with the end of the storage withdrawal season in sight, according to EBW Analytics Group. Historically, in years in which winter space heating demand has been weak, natural gas prices have frequently bottomed out in February or March and then started to recover, with the market increasingly looking toward the potential for summer price spikes, the firm said.
This year, however, the odds of a rebound are low. “By early March, space heating demand should rapidly fade. April weather is likely to be far milder than last year, one of the coldest Aprils on record,” EBW said.
In addition, renewable energy output is expected to reach record high levels, further reducing demand for natural gas, according to the firm, while concerns regarding potential curtailments of U.S. liquefied natural gas (LNG) exports could intensify. “With natural gas storage already far above year-ago levels, greatly reducing the risk of summer price spikes, the most likely scenario is for gas prices to continue to fade.”
In its February Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) projected that that Lower 48 working natural gas in storage would end the 2019-20 winter heating season at 1,935 Bcf, which is 12% higher than the previous five-year average. Total natural gas in storage at the start of this heating season was 3,725 Bcf on Oct. 31, 2019, and the agency expects withdrawals from working natural gas storage to total 1,790 Bcf at the end of March 2020.
“If realized, this would be the least natural gas withdrawn during a heating season since the winter of 2015-16, when temperatures were also mild,” EIA said.
Meanwhile, EIA forecasts that net injections during the refill season (April 1-Oct. 31) would bring the total working gas in storage to 4,029 Bcf, which, if realized, would be the largest monthly inventory level on record.
For now, though, tight supply/demand balances appear to be working to keep a floor under prices. The prompt-month Nymex contract hung around the $1.87-1.88 level for most of Sunday evening, but then fell lower due to the warmer move in the overnight weather models, according to Bespoke. However, prices temporarily bounced off their intraday lows.
“This has been a trend that we have seen over the last few weeks, with an early-morning low but then some rallying into cash trading,” Bespoke said. While Monday’s cash trading failed to offer any support to futures, it is possible the weather system on tap later this week could spark a rally.
In terms of the balance picture, production has moved up slightly to around 91.8 Bcf/d, though remains 4.3 Bcf off the high from late November, Bespoke said. LNG intake also was higher on Monday, however, back above 9.0 Bcf.
“In short, the overall theme remains the same, with a tight fundamental balance battling a weather pattern that stays quite warm. Fears regarding LNG shut-ins later this year also continue to weigh on the curve,” Bespoke said.
Another day or so of unusually balmy weather kept a lid on spot gas markets on Monday, with next-day prices continuing to decline as much of the United States was expected to see above-average temperatures in the 40s to 70s, according to forecasts.
However, a midweek blast of frigid air is expected to “aggressively” push across the Canadian border into the west-central United States, bringing with it overnight lows ranging from below zero to 20s, NatGasWeather said. The system is then forecast to sweep across the Great Lakes, Ohio Valley and Northeast Thursday-Sunday for a surge in national demand, aided by lows of 30s into the South and Southeast, the firm said.
This Feb. 27-March 1 period remains “rather chilly” with national heating degree days (HDD) solidly above normal and where the pattern remains cold enough, according to NatGasWeather. “However, mild conditions are still favored to spread across most of the United States March 3-7 as cold retreats into Canada and where the pattern still would need to be colder.”
Given the weak price environment, power burns have been on a tear despite the mild winter. Genscape Inc.’s daily power demand model is estimating year-to-date power demand up 2.7 Bcf/d versus last year. On a weather-normalized basis, gas demand for power is up around 4 Bcf/d year to date compared to 2019, as HDDs have been lower by an average of 3.7 HDDs to last year, the firm said.
“Lower gas prices are the primary driver of the growth in weather-adjusted demand,” Genscape senior natural gas analyst Eric Fell said. “Through the first eight storage weeks of the year, Henry Hub cash has averaged $1.95 in 2020, compared to $2.92 in 2019 and $3.29 in 2018.”
The increase in burn has lifted gas as a percentage of thermal generation by an average of around 13% versus the same weeks last year. Coal generation has averaged around 83 average gigawatt hours (AGWH) over the last eight weeks, which is a decline of more than 40 AGWH versus the same weeks last year, while gas generation is up more than 20 AGWH, according to Genscape.
While lower gas prices are the main driver, gas demand also continues to shift higher structurally due to coal retirements and gas additions. Per EIA data as of November, year/year combined-cycle capacity increased by 8 gigawatts (GW) to 269 GW, while other gas-fired capacity was flat at 207 GW. Coal capacity fell by 11 GW versus the prior year to 233 GW.
“Coal is not dead, but coal utilization has fallen below 40% year to date to new all-time lows in 2020,” Fell said.
With most market hubs priced already well under $2, losses on Monday were small. On the West Coast, SoCal Border Avg. cash slipped 5.0 cents to $1.750. Next-day gas at Kingsgate, in the Rockies, fell 3.0 cents to $1.705.
Texas markets posted similarly small declines, although Waha spot gas traded as low as zero.
Midwest cash fell less than a nickel at the majority of pricing hubs, while slightly more pronounced decreases were seen in Louisiana. Texas Eastern E. LA was down 9.5 cents to $1.770.
On the East Coast, Dominion Energy Cove Point cash dropped 14.5 cents to $1.875, while Transco-Leidy Line tumbled 11.5 cents to $1.590. Transco Zone 6 non-NY next-day gas was down 22.0 cents to $1.675.
Prices across the border in Western Canada posted modest gains of a few cents despite lower exports to the United States due to the milder weather. NOVA/AECO climbed 3.0 cents to C$1.715/GJ.
Genscape estimates showed that U.S. imports from Canada had retreated back below the 5 Bcf/d mark for Monday. Last week, imports surged to 6 Bcf/d, and the week prior saw a 6.5 Bcf/d print, primarily driven by seasonal cold in the Northeast bringing in incremental molecules via Iroquois Pipeline and Maritimes & Northeast Pipeline, according to the firm.
“With that cold having departed volumes are back down,” Genscape senior natural gas analyst Rick Margolin said.
Despite the recent days’ declines, February month-to-date total U.S. net imports from Canada are averaging 5.1 Bcf/d, which is about 0.7 Bcf/d above this past January and nearly 0.8 Bcf/d above February 2019. The figures are in line with Genscape’s Forward Supply & Demand forecast.
“March volumes are expected to show their typical seasonal retreat as well as show some moderate year/year declines, primarily resulting from the ongoing storage deficit in Western Canada that needs to be rebuilt,” Margolin said.