• April Nymex futures up 15.8 cents to $1.936/MMBtu
  • “There is no doubt the outlook is now quite difficult for indebted shale operators”: GlobalData
  • “Even in the most extreme scenario, the impact on production is not likely to occur as quickly as many traders expected,” says EBW
  • Spot prices follow futures higher despite mild weather

 

Extending the previous day’s gains, natural gas futures staged a furious rally Tuesday as the potential upstream fallout from plummeting oil prices has breathed new life into a chronically oversupplied market. The April Nymex contract surged 15.8 cents to settle at $1.936/MMBtu.

Meanwhile, spot prices followed the futures higher, with most hubs throughout the Lower 48 picking up a dime or more on the day; NGI’s Spot Gas National Avg. climbed 17.5 cents to $1.650.

April WTI crude futures pared their recent losses Tuesday, recovering $3.23 to settle at $34.36/bbl. That followed Monday’s rout, a $10.15 sell-off prompted by reports of a breakdown in supply cut talks between the Organization of the Petroleum Exporting Countries and its allies, and of a price war breaking out between Saudi Arabia and Russia.

The natural gas market has embraced the precipitous decline in crude prices as a bullish signal, one that portends a drop in supply as producers are forced to tighten their belts. What’s more, this time round is likely to look different than the downturn in late 2014, according to analysts.

“There is no doubt the outlook is now quite difficult for indebted shale operators, and although it is too early to say with accuracy which companies will be driven out of the game or into bankruptcy, the count will likely be more than in previous years,” GlobalData oil and gas analyst Adrian Lara said Tuesday. “Oil breakeven prices for premium acreage can reach less than $25/bbl for some operators, but once less productive acreage is included in a company’s position, the price needed to remain profitable is no less than $40/bbl.”

Given a WTI price around $30/bbl and “uncertainty around how much lower the price can be, drilling activity will be significantly reduced in the short term, ultimately reducing production. For the rest of 2020 operators are to rethink their development strategies in order to reduce expenditure and focus on their best productive acreage.”

Still, while the market has approached the drop in oil as bullish for gas, EBW Analytics Group analysts described a more complicated set of potential impacts from crude’s collapse.

“Even in the most extreme scenario, the impact on production is not likely to occur as quickly as many traders expected,” the EBW analysts said. “A significant portion of 2020 production is hedged, and the penalties for canceling contractual commitments for rigs, pumping equipment and crews are steep.

“Further, in the Permian Basin and other oilier plays where takeaway capacity is constrained, unused pipeline capacity is likely to be quickly snapped up by producers currently flaring gas. Decimation of the oil and gas industry is also likely to significantly reduce industrial use of natural gas,” and U.S. liquefied natural gas exports “could soon plunge. At least for now, though, the market is likely to focus primarily on supplies, potentially boosting natural gas prices significantly.”

The decline in oil prices led Genscape Inc. to issue a fully revised production forecast to clients to reflect the new realities in the crude market.

“With the balance of 2020 WTI price shedding $10 compared to our previous forecast, lower expectations for oil output remove about 0.86 Bcf/d of gas from the December 2020 production forecast,” Genscape analyst Ben Chu said in a note to clients early Tuesday. “This accounts for the roughly six-to-eight-month lag between price signals and actual production.

“Cal 2021 production was lowered due to the WTI Cal 2021 strip losing $8 since our last forecast, which pulls more than 2.2 Bcf/d out of the Cal 2021 gas production forecast, and even sharper declines to the 2022 production forecast.”

Looking nearer term, Genscape’s estimate for Lower 48 production for Tuesday came in at 91.4 Bcf/d.

“Though that number is likely to be revised up in later reporting cycles, it presently marks a 33-day low,” Genscape senior natural gas analyst Rick Margolin said. “This brings the March to-date production average to 92.8 Bcf/d. Though the month-to-date figure is essentially flat to February, it is still more than 4.2 Bcf/d greater than March 2019.”

As for the latest weather outlook Tuesday, NatGasWeather tallied a 17 heating degree day (HDD) increase in the European model day/day, with its Global Forecast System counterpart dropping 16 HDD day/day.

Based on the cooler trends in the European model, the forecaster described the two-week outlook as “not a frigid bullish pattern, just not as bearish as the data showed Monday.” Still, “it’s difficult to know exactly how much weather patterns are impacting prices” after the “oil market crash and furious natural gas rally on prospects of lost associated gas production.

“...But it seems the natural gas markets could become more sensitive to weather trends if the balance continues to show tightening.”

Looking ahead to this week’s Energy Information Administration (EIA) storage report, Energy Aspects issued a preliminary estimate for a 59 Bcf withdrawal for the week ending March 6.

The seasonal dropoff in gas-weighted heating demand “nearly halves the withdrawal rate week/week,” Energy Aspects said. “Power burn and residential/commercial demand are poised to decline by 1.7 Bcf/d and 4.0 Bcf/d, respectively. Had it not been for Permian maintenance, production would have registered a stronger reading than its projected 0.3 Bcf/d week/week decline.”

Cash Rallies Too

With prices entering Tuesday’s day-ahead trading already at low levels, spot markets took their cues from futures and easily shrugged off a generally mild near-term weather outlook. Benchmark Henry Hub jumped 12.0 cents to $1.850.

Changes in the forecast since late last week have increased near-term demand expectations, but the overall picture remains underwhelming compared to seasonal norms, according to Genscape. Compared to last Friday’s forecast, the next 10 days are now expected to bring an additional 8 HDD.

“However, because the brunt of the cold comes during the weekend and primarily hits western markets, the impact to total U.S. demand is not quite as sharp,” Margolin said.

Genscape’s estimate for Tuesday’s demand was 79 Bcf/d, and this figure was expected to peak at 91.6 Bcf/d by Monday.

“In addition, it is worth pointing out that at no point are HDD projected to reach seasonally normal levels, a factor that makes the year’s first injection numbers imminent,” according to Margolin.

Locations throughout the country generally gained in step with Henry Hub Monday, with day/day increases of around 10-20 cents the norm in the Gulf Coast, Midwest, Midcontinent, Northeast, Southeast, Appalachia and the Rockies.

Heavily discounted West Texas hubs posted notably higher gains on the day. Waha added 41.0 cents to 88.0 cents. Farther downstream, in California, SoCal Border Avg. picked up 16.0 cents to $1.670, while SoCal Citygate added 9.5 cents to $2.230.

Southern California Gas (SoCalGas) could see import restrictions this week amid maintenance on its Line 2001 that could impact flows through its Southern Zone, according to Genscape analyst Joe Bernardi.

“The exact magnitude of potential cuts is obscured due to the pipe’s flow methodology for this zone, and market impacts may remain muted due to mild weather and ample storage,” Bernardi said.

Starting Tuesday and continuing through Friday, Line 2001 maintenance was expected to limit firm operational capacity through the Southern Zone -- consisting of the Ehrenberg, Blythe and Otay Mesa receipt points -- by 300 MMcf/d, the analyst said. Firm operating capacity through this location over the past 30 days has been 758 MMcf/d, but flows have averaged 848 MMcf/d and maxed at 933 MMcf/d.

This is “due to the presence of variable local demand upstream of the main flow constraints” near the Los Angeles Basin, Bernardi said. “Therefore, while this work could cut up to 300 MMcf/d based on the operating capacity restriction, it will likely have less of an impact than that because of the peculiarities of this zone. Systemwide demand on SoCalGas is expected to remain mild this week due to continued normal temperatures.

“If this work lasts longer than expected, though, there is potential for more pressure on prices due to a cold front expected to hit Southern California this weekend and early next week, boosting demand.”