Natural gas futures capped the first week of May with a third straight day of losses as near-term demand weakness trumped a sustained drop in production. The June Nymex gas futures contract settled Friday on the lower end of its trading range, off 7.1 cents day/day at $1.823. July fell 5.0 cents to $2.077.

Spot gas prices slid again on Friday amid light demand expected for most of the country. Led by a sharp sell-off in the Northeast, where record lows were forecast for the weekend, NGI’s Spot Gas National Avg. fell 11.5 cents to $1.625.

Despite the unusual cold set to hit the East Coast in the coming days, a milder pattern is seen emerging by mid-May, setting the stage for a string of hefty storage injections. Traders on Friday were still digesting the latest Energy Information Administration (EIA) data, which showed a 109 Bcf build into inventories for the week ending May 1.

Genscape Inc., which had estimated a 107 Bcf injection, said the actual EIA figure appears loose by about 5 Bcf/d versus the prior five-year average. Nevertheless, the stat was “meaningfully” tighter than the prior week as well as the all-time record loose number in April, as production declines are beginning to tighten supply and demand balances, according to the firm.

“Recent declines in gas production are being driven by crude production, which has fallen by more than 1 million b/d since the end of March,” said Genscape senior natural gas analyst Eric Fell.

Genscape’s production team estimates around 2 Bcf/d of associated gas for every million barrels per day of oil. “While underlying gas demand has yet to stage a meaningful rebound from Covid-19 related demand destruction, the demand impact from Covid-19 may have at least reached a near-term peak,” Fell said.

The analyst pointed out that refinery runs increased slightly week/week, and ethanol production ticked slightly higher as well. While the increase in refinery runs is “an encouraging sign,” both crude and product inventories still grew faster than seasonal norms last week, Genscape data show.

“This suggests that runs may need to fall further absent a more meaningful recovery in gasoline demand,” Fell said. “However, with states opening up, some near-term demand recovery for refined products seems very likely.”

The near-term demand story also is heavily weighed upon by liquefied natural gas (LNG) demand, which seems to be more bearish by the day. Energy Aspects pointed out that global gas benchmarks are in steep contango for the coming months, and analysts said further downside is possible for Dutch Title Transfer Facility prices in the third quarter as European storage nears capacity.

“Europe is in the process of lifting some of its Covid-19 lockdowns, but demand will naturally remain weak in the coming months because of residual social distancing measures and economies falling into recession,” Energy Aspects said.

The extension of lockdowns in India and Japan in recent days are projected to further weaken global LNG demand in the coming weeks, according to the firm. However, the high point for cargo rejection will likely be reached in June-July, “with potential fuel switching in Northeast Asia and floating storage providing an outlet for LNG exports in late summer,” it said.

Shipbroker Poten & Partners told NGI recently that more than 30 U.S. cargoes have been canceled for June, and more cancellations are likely through October.

Supportive Supply

Lower 48 production, estimated to be around 87.5 Bcf early Friday, continues to be bullish for the gas market, according to various analysts, but the cuts are more supportive for the winter, rather than the near term.

Meanwhile, the latest Baker Hughes Co. figures indicate the pace of retrenchment may be slowing. The latest rig figures showed the week/week rig count declining by 34; in April, Baker Hughes reported four straight weeks of 60-plus rig drops. As of Friday, the total U.S. rig count stood at 374, more than 600 units behind year-ago levels, according to the firm.

The Permian Basin rig count continues to plunge at a faster clip than most basins across the Lower 48, and this week, the market heard from a slate of exploration and production companies who offered insight into their plans to weather the coronavirus and the oil market downturn. Occidental Petroleum Corp. (Oxy) said shut-ins would likely reach around 75,000 boe/d by June, while Diamondback Energy Inc. said it would run only four rigs in the West Texas play by then, down from the current 14. Parsley Energy Inc. and Centennial Resource Development Inc. also outlined their plans to weather the challenging period.

With the recent rally in oil prices and pipeline scrapes being revised higher, this has helped mitigate associated gas supply concerns and allowed near-term prices to crumble, according to EBW Analytics Group. The firm remains bullish on the winter 2020-21 strip, but said near-term pricing “is likely to stay volatile as the market attempts to adjust to rapidly changing supply and demand expectations.”

Colder Than Christmas

Despite the potential for record-breaking low temperatures in the East, spot gas prices cratered on Friday. In fact, even with some cities forecast to have chillier temperatures on Mother’s Day than they had on Christmas, the Northeast posted some of the largest declines for gas delivered through Monday.

The National Weather Service (NWS) said that along and east of the Mississippi River, an Arctic air mass is expected to usher in cold temperatures and blustery conditions this weekend. “Numerous” freeze watches and warnings were posted from the Midwest to the Northeast, with record low temperatures possible, most notably Saturday morning, according to the forecaster.

“In addition to the winter-like temperatures, parts of the Great Lakes, Appalachians and Northeast will witness wintry precipitation” into Saturday as a surface low pressure system rapidly intensifies off the New England coast, NWS said. “Snow could fall heavily at times, with several inches of accumulating snowfall possible in the northern and central Appalachians.”

Despite the chilly outlook, Transco Zone 6 non-NY cash tumbled 21.5 cents to average $1.365 for gas delivered through Monday, while Tennessee Zone 6 200L fell 19.5 cents to $1.475.

Markets across Appalachia put up similarly steep declines for the three-day gas delivery, while Southeast prices fell around 10 cents or so day/day.

Starting on Saturday and continuing through May 18, East Tennessee Pipeline will conduct a hydrostatic test on its 3100 Mainline from the Clark Range to Wartburg compressor stations, both located in Tennessee. During this time, capacity through Clark Range is to be reduced to zero.

“Flows through Clark City have averaged 96 MMcf/d and maxed at 134 MMcf/d over the last two weeks, and flows have been trending upwards due to demand from the cold snap in the East,” Genscape analyst Josh Garcia said.

The analyst noted that East Tennessee will allow this isolated segment between Clark Range and Wartburg to flow bidirectionally and source gas internally, as there is only 1 MMcf/d of net demand on this segment. Furthermore, the Southern 3200 Line has ample available capacity and could be used to flow the missing supply up to serve demand on the 3300 Line heading to Northeast Tennessee and Virginia, Garcia said.

In the country’s midsection, spot gas price declines were in line with the East, sliding north of 10.0 cents day/day. Chicago Citygates cash was down 18 cents to $1.690, and OGT was down 10.5 cents to $1.600.

Similar losses extended across Texas, except in the western part of the state. El Paso Permian averaged $1.535 for gas delivered through Monday, up 4.0 cents day/day.