• April Nymex futures up 7.0 cents to $1.778/MMBtu
  • “We believe a sharp reduction in U.S. shale oil drilling would, all else equal, be positive for natural gas prices,” says Goldman Sachs
  • We advise caution trading this or any other market in these current conditions”: Bespoke
  • West Texas spot prices rally despite pipeline maintenance

On another day of widespread economic uncertainty, natural gas futures recovered from an early swoon Monday, rallying sharply as bulls latched onto the prospect of the oil price collapse leading to cuts in associated gas output. After trading as low as $1.610/MMBtu, the April Nymex contract went on to settle at $1.778, up 7.0 cents day/day. Gains were even stronger further along the strip, with the Winter 2020/21 contracts gaining around a dime.

In the spot market, forecast maps advertising widespread warmer-than-normal temperatures the next few days accompanied a mix of adjustments throughout the Lower 48; NGI’s Spot Gas National Avg. added 1.0 cent to $1.475.

Cries of price war reverberated through oil markets and the broader economy Monday, adding to a cacophony of coronavirus-related angst. The April West Texas Intermediate (WTI) contract settled at $31.13/bbl, down $10.15 day/day after trading as low as $27.34.

Natural gas futures initially appeared to move in sympathy with the carnage occurring in oil markets. However, as traders had time to mull the implications of a drastically altered outlook for crude prices, the momentum swung decisively upward for gas.

“We believe a sharp reduction in U.S. shale oil drilling would, all else equal, be positive for natural gas prices,” Goldman Sachs Equity Research analysts led by Brian Singer wrote in a note to clients early Monday. “We estimate if our covered producers invest on the basis of $30-45/bbl WTI over the next five quarters, we will see more than 1 Bcf/d net less U.S. gas production.”

For a natural gas market laboring under a seemingly relentless supply glut in recent years, a potential step-change lower in production expectations provided a bullish jolt.

“The combination of cash prices and a slightly cooler weather forecast, although still warm overall, certainly helped assist in the move higher, but the main catalyst appears to be tied into the now very low price in crude oil, as this is raising concerns that production will decline later in the year,” Bespoke Weather Services said following Monday’s close. “This is why we saw the most strength in next winter’s contracts...while this adds a new wrinkle in terms of potential volatility, it makes the puzzle a little more difficult,” gas traders will now have to factor in a much different oil price outlook on top of weather and balances.

“All in all, with all of these moving parts, it makes predicting the market’s next move difficult...We advise caution trading this or any other market in these current conditions.”

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 demand shocks. Over the weekend that conflict -- principally between Saudi Arabia and Russia -- escalated into a full-fledged competition for market share, according to analysts.

“Concerns heading into the weekend” centered around comments by Russian Energy Minister Alexander Novak that countries would be “free to produce at will starting April 1” and “start a fight for market share,” analysts at Tudor, Pickering, Holt & Co. (TPH) said in a note to clients. “Unfortunately, Saudi Arabia appears to be following suit, with official selling prices (OSP) for April shifting significantly lower in key geographies including the U.S., Europe and Asia.

“Following March OSPs, which had been set at premiums to various benchmarks, April prices shifted $5-10/bbl lower depending on the grade and region to healthy discounts instead of premiums -- a grab for market share if we’ve seen one.”

The drop in oil prices portends “serious consequences” for the U.S. upstream sector, according to TPH.

As for U.S. liquefied natural gas (LNG) exports, the outlook is more complicated, with analysts seeing varying impacts on the global gas trade from oil’s tailspin.

West Texas Gains

West Texas hubs strengthened Monday as maintenance in the region appeared to have little impact on prices. Waha climbed 21.0 cents to average 47.0 cents, while El Paso Permian averaged 54.5 cents, up 20.5 cents.

A one-day event on Transwestern Pipeline was expected to reduce capacity on the West Texas lateral by 156 MMcf/d Tuesday, or a 141 MMcf/d cut versus 678 MMcf/d of flows over the past 30 days, according to Genscape Inc. analyst Matt McDowell.

“The pipeline is isolating and blowing down a portion of its West Texas Loop Line for valve replacement,” McDowell said. “Permian production making its way onto Transwestern will be constrained, with only a single 50 MMcf/d interconnect” with Northern Natural Gas “available for reroutes.”

Farther downstream in the Desert Southwest, a restriction on the Dutch F compressor on El Paso Natural Gas (EPNG) in western Arizona was expected to impact up to 116 MMcf/d of volumes bound for California starting Tuesday, according to the analyst. The maintenance was scheduled to last three days, with affected volumes ranging from 35-116 MMcf/d.

“The Dutch F station serves as an interconnection between EPNG’s North and South mainlines just upstream of the Arizona/California border,” McDowell said. “It has bidirectional capability but almost always flows north to south, usually at or near capacity.”

In Arizona/Nevada, El Paso S. Mainline/N. Baja jumped 35.0 cents to $1.560, while in California, SoCal Citygate added 24.5 cents to $2.135.

Most Rockies hubs finished higher on the day. Kingsgate added 2.5 cents to $1.515.

A 20-day maintenance event on the Gas Transmission Northwest (GTN) system was expected to restrict flows through Kingsgate starting Tuesday, according to McDowell.

“The maintenance on GTN’s Starbuck and Eastport stations is going to restrict Alberta imports, which have averaged 2,434 MMcf/d across the last 30 days,” McDowell said. “Despite the supply shortage imposed by the maintenance, two key Pacific Northwest storage facilities are above their five-year rolling average. Mist storage inventories are currently 2 Bcf above their five-year average, and Jackson Prairie working gas is about 1.4 Bcf above its five-year average.”

Genscape estimates as of early Monday showed a 207 MMcf/d restriction through Kingsgate. However, in a subsequent notice, GTN delayed the start of work at the Starbuck compressor to Thursday instead of Tuesday.

This maintenance event is one of several scheduled on GTN’s system for this spring and summer that would limit volumes through Kingsgate. It also coincides with a decline in Canadian imports through Northern Border amid greater competition from new processing capacity in the Bakken Shale, McDowell said.

“This points to potential competition with NOVA/AECO prices should they shed any weight in response to GTN’s restrictions,” the analyst said.

Elsewhere, widespread warmer-than-normal temperatures over the eastern two-thirds of the Lower 48 offered little upside for prices. Appalachia and Northeast locations saw discounts, while Midwest prices were mixed but generally traded close to even.