- April Nymex futures down 6.4 cents to $1.708/MMBtu; May down 6.5 cents to $1.748
- “This pattern type just refuses to change and is not showing signs of notable change even heading into late March”: Bespoke
- Lack of clarity from OPEC on cuts sends oil plummeting amid expected coronavirus demand shocks
- Maintenance limiting deliveries from El Paso Natural Gas into Sierrita Pipeline: Genscape
As an oil price war broke out over the weekend to compound the energy industry’s anxieties over the demand impacts of the coronavirus, natural gas futures also came under significant downward pressure in early trading Monday. The April Nymex contract was down 7.4 cents to $1.634/MMBtu at around 8:35 a.m. ET.
Crude prices had already dropped sharply late last week on reports that the Organization of the Petroleum Exporting Countries (OPEC) and its allies failed to agree on a plan to reduce supply in the face of coronavirus-related demand shocks. Over the weekend that conflict -- principally between Saudi Arabia and Russia -- escalated into a competition for market share, according to analysts.
The spread of the coronavirus continued to capture the attention of markets Friday, and as a wave of selling swept through oil and equities, natural gas futures followed suit. The April Nymex contract fell 6.4 cents to settle at $1.708/MMBtu, while May settled at $1.748, down 6.5 cents.
In the spot market, forecasts calling for widespread mild temperatures by the end of the weekend prompted discounts on deals for three-day delivery; NGI’s Spot Gas National Avg. tumbled 12.0 cents to $1.465.
Across the energy landscape, the sell-off in natural gas futures was overshadowed by an even more pronounced drop in crude prices Friday amid reports that OPEC and its allies failed to agree on a plan to reduce supply in the face of coronavirus-related demand shocks.
Nymex West Texas Intermediate front month futures settled at $41.28/bbl Friday, down $4.62 day/day.
“Today’s outcome is a psychological blow for the market, as the steep plunge in oil prices shows,” said Wood Mackenzie’s Ann-Louise Hittle, vice president of Macro Oils for the firm.
The expiration of the current deal between OPEC and its allies at the end of March means “the market is now facing the specter of unrestrained production,” Hittle said. “...However, we do not think Saudi Arabia will push hard to lift their output in the Northern Hemisphere spring. Given weak demand and the likelihood this weakness will persist into the second quarter, it will be hard for any producer to increase their output sharply once the original production deal expires at the end of this month.”
In a note to clients, ClearView Energy Partners LLC analysts described Friday’s outcome as “a worst-case scenario for OPEC, with the producer group unable to coordinate a supply response to potentially offset the global oil demand loss related to coronavirus.”
As for gas prices Friday, broader economic uncertainty over the spread of the coronavirus (evidenced by another down day for major stock indexes) and a persistently mild forecast for March combined to keep bulls on the sidelines.
Guidance Friday led Bespoke Weather Services to adjust its forecast “marginally” warmer. But this may be enough to put this month on track to become “the third warmest March in the historical record,” the forecaster said.
“The pattern continues to be above to much above normal over the entire area from the Plains to the East and down into the South,” Bespoke said. “We do see some modest below-normal temperatures now showing up in parts of the West from the middle of the six- to 10-day period into the 11-15 day.
“We believe models may be overdoing the intensity of cold even here, but it may be just enough to keep us from catching 2016, which was the second warmest March on record. These discussions sound quite repetitive, but that is simply because this pattern type just refuses to change and is not showing signs of notable change even heading into late March.”
Meanwhile, the Energy Information Administration (EIA) Thursday reported an on-target 109 Bcf withdrawal from U.S. gas stocks for the week ended Feb. 28, close to the five-year average of 106 Bcf but lighter than the 152 Bcf withdrawal recorded last year.
Total Lower 48 working gas in underground storage stood at 2,091 Bcf as of Feb. 28, 680 Bcf (48.2%) higher than year-ago stocks and 176 Bcf (9.2%) above the five-year average, according to EIA.
“The good news is this week’s storage print was in line with consensus and the five-year average” despite total degree days coming in 4% below five-year norms, analysts at Tudor, Pickering, Holt & Co. (TPH) said in a note Friday. “The bad news is despite flow data showing a roughly 1 Bcf/d drop in supply this week, it comes almost entirely from Texas (800 MMcf/d), where Waha prices dipped into the negative, suggesting the drop in supply is not resulting in a tightening of the supply/demand balance but rather that seasonal demand is eroding, stranding the gas.”
The potential “ugly” news could come from next week’s EIA print, according to the firm. TPH estimates point to a 51 Bcf draw, which would grow the surplus to the five-year average from 9% to 14%, leaving “an 18% surplus to exit March still in the cards.”
Genscape Inc. estimated this week’s reported draw as about 1.6 Bcf/d tighter than the five-year average when compared to degree days and normal seasonality.
“Once again, it is difficult to reconcile this week’s reported storage change versus last week, with a reported withdrawal falling 34 Bcf week/week compared to a decline in demand of more than 50 Bcf driven by roughly 30 fewer degree days,” Genscape analyst Eric Fell said. “This week’s stat essentially confirms that the last two storage stats were indeed a case of weekly EIA inventory true-up, with the withdrawal from two weeks ago being overstated, which led to last week’s withdrawal being understated.
“This is one reason not to put too much stock in a single storage number. Instead, it is preferred to look at a string of several weeks in order to reduce the noise from bad data.”
Mild to Warm
The bearishness was by no means confined to the futures markets Friday, as spot price regional averages fell by a dime or more across most of the Lower 48. With the orange and red hues of unseasonably warm temperatures seemingly dominating weather maps, hubs in key demand areas of the Midwest and Northeast struggled to stay above the $1.500 mark.
Starting with the upcoming work week and continuing into mid-March, the weather data “maintains a rather mild to warm pattern across most of the United States, with weak cooling only near the Canadian border,” NatGasWeather said Friday. “This setup would result in highs of 50s to 80s over all but the far northern United States.”
Chicago Citygate fell 11.5 cents to $1.530 Friday, while farther east, Transco Zone 6 NY dropped 14.0 cents to $1.535. Upstream in Appalachia, Texas Eastern M-2, 30 Receipt dipped 13.0 cents to $1.405.
Early in the upcoming work week, Texas Eastern Transmission (Tetco) has scheduled a pair of “significant maintenance events” in its M-2 zone as part of its spring maintenance season, according to Genscape analyst Josh Garcia. The first event involves cleaner and tool runs on the 30-inch Line between Berne and Holbrook in Ohio, scheduled for Monday and Wednesday.
“During these tool runs, capacity through the Berne 30-inch Line compressor will be reduced by 100 MMcf/d to 1.6 Bcf/d,” Garcia said. “While temperatures are forecasted to be milder than seasonal norms during this outage, Berne flowed 1.73 Bcf/d at similar temperature levels” on Wednesday and Thursday, “meaning that up to 130 MMcf/d of flows could be impacted should downstream demand materialize similarly.”
The other event in Tetco’s M-2 zone, scheduled for Tuesday, involves in-line inspection tool runs between the Five Points and Somerset compressors on the 26-inch diameter Line 3 in Ohio, the analyst said.
“During this outage, capacity through this line will be reduced to as low as 324 MMcf/d, impacting as much as 326 MMcf/d of flows compared to the previous two-week max,” Garcia said. “Curtailments later in the month are likely to be less impactful as temperatures warm.”
Maintenance scheduled over the weekend was expected to limit around 106 MMcf/d of Permian Basin-originated volumes flowing from El Paso Natural Gas (EPNG) toward Mexico via the Sierrita Pipeline, according to Genscape.
“Sierrita will cut its receipts from EPNG at its interconnect near Tucson, AZ, to zero for the duration of the work,” Genscape analyst Matthew McDowell said. “Sierrita has been receiving an average 106 MMcf/d during the last 30 days from El Paso South Mainline in Arizona. This is the sole source of supply to Sierrita, the entirety of which (minus fuel and pipe loss) Sierrita delivers to the Sonora pipeline.”