The front month natural gas futures contract rallied ahead of expiration Friday, with potential August heat and a tight storage picture offering support in a market still heavily weighed down by production. In the spot market, most regions posted discounts on three-day deals, including in the sweltering California and Desert Southwest; the NGI National Spot Gas Average dropped 21 cents to $2.70/MMBtu.
The August Nymex futures contract went off the board on a high note Friday, rallying 4.2 cents to expire at $2.822 after trading as high as $2.831. Gains were more modest further along the strip, with the September contract adding 2.0 cents to settle at $2.782 and January adding 1.4 cents to settle at $3.039.
Bespoke Weather Services noted after Friday’s close that “in this low storage environment with firmer cash relative to prompt month futures we continue to see strong contract expiries.” The firm’s team sees “a market with risk weakly skewed higher but concern about storage not yet high enough to really break prices out. We would want to see a winter-led rally bring the September contract above $2.80-2.82 to really believe that sentiment has shifted back in a bullish direction.
“Yet fundamentals appear to remain quite bullish overall; burns continue to run quite tight on a weather-adjusted basis and though production is still very elevated it sits off recent highs,” the firm said. “Throw in how tight” Energy Information Administration (EIA) storage data has been the past few weeks, “and it becomes harder to believe production is exactly as elevated as estimated.”
EIA reported a 24 Bcf injection into Lower 48 gas stocks for the week ended July 20, lower than most estimates and well below the five-year average 46 Bcf. Last year, EIA recorded a 19 Bcf injection.
“Compared to degree days and normal seasonality, the 24 Bcf injection is about 1.5 Bcf/d tight versus the five-year average,” Genscape Inc. analysts Margaret Jones and Eric Fell said. “Relative to the previous week, total power generation was up about 20 average GWh. Collectively, nuclear and renewable gen were close flat week/week (w/w). Coal was up an estimated 7 average GWh w/w, and gas generation was up about 13 average GWh for an estimated 2.6 Bcf/d more gas burn w/w.”
While inventories sit at a 705 Bcf deficit to last year, “the year-on-year deficit did tighten marginally and is now the smallest it has been since late March,” Jones and Fell noted.
Looking ahead, The Desk’s Early View storage survey issued on Friday showed respondents on average expecting EIA to report a 42.9 Bcf build for the week ending July 27. Responses ranged from 32 Bcf to 51 Bcf. Last year, EIA recorded an 18 Bcf injection, and the five-year average is a build of 43 Bcf.
The midday weather data came in hotter for the Aug. 4-8 period, “seeing hot high pressure build more aggressively across the east-central U.S., then little changed Aug. 9-13,” NatGasWeather said. “Overall, we see it as a touch hotter due to more impressive heat over the eastern half of the country.
“…Any hotter trends and front month prices could come back after the break adding a few additional cents,” according to the firm.
Turning to the spot market, prices in Southern California and the Desert Southwest sold off sharply Friday after earlier spiking to astronomical levels during an extremely hot week in the region.
SoCal Citygate dropped $7.16 to average $8.64, still a hefty premium to Henry Hub but downright cheap compared to prices that averaged close to $40 on Monday. Elsewhere in the region, SoCal Border Average shed $2.80 to average $3.78, while in Arizona/Nevada, El Paso S. Mainline/N. Baja plummeted $6.58 to $3.23 as Kern Delivery tumbled $6.09 to $4.26.
“A dangerous heat wave will continue out West through Saturday underneath of a stubborn upper level ridge,” the National Weather Service said Friday. “Temperatures across portions of the Desert Southwest and California are forecast to be in the triple digits, which is as much as 5 to 10 degrees above normal. Excessive heat warnings and heat advisories remain in effect across interior and southern California, far northwest Arizona and southern Nevada.
“Furthermore, another heat wave is expected across the Pacific Northwest, with highs forecast to be in the low to mid 90s for Sunday into Monday. An excessive heat watch is in place across this area.”
Southern California Gas Co. (SoCalGas), which ended a system-wide curtailment watch Thursday in place because of elevated heat-driven demand, was forecasting total system demand to drop to around 2.3 million Dth/d over the weekend, versus an estimated 2.6 million Dth/d on Friday. The utility was expecting demand to bounce back up to around 2.6 million Dth/d after the weekend.
Meanwhile, Intercontinental Exchange power indices for delivery Sunday and Monday showed peak prices in the SP-15 and Palo Verde regions hovering close to $100/MWh after surging above $300/MWh early in the week.
Elsewhere, prices in the Northeast and Midwest dropped heading into the weekend as Radiant Solutions was forecasting comfortable temperatures Monday across a number of major cities in those regions.
The forecaster predicted highs in Chicago on Monday and Tuesday in the upper 70s, while Boston and New York City were expected to start the work week with temperatures averaging near normal, including highs in the low 80s.
The weather outlook Friday appeared “relatively bearish” through the middle of the upcoming week “as a series of weather systems with showers and cooling sweep across the Midwest and east-central U.S., including bringing showers deep into the South for a little lighter demand,” according to NatGasWeather. The East Coast was expected to remain warm through the weekend into the early of the upcoming week, “with highs of mid to upper 80s, then warming several additional degrees” during the middle and end of the week “as hot high pressure arrives off the Atlantic Ocean.”
Further upstream in Appalachia, Dominion South dropped 6 cents to $2.39.
“A simple linear projection based on completion percentages reported in the last few Nexus construction reports suggests that the project is well on track to hit its scheduled mechanical completion in mid-August, almost exactly in line with its implementation plan filed last year,” Genscape analysts Colette Breshears and Laura Munder said.
Genscape analysts expect Nexus to file negotiated rate contracts and tariff information in the coming days that total about 885 MMcf/d of contracts, “representing approximately 60% of the project’s 1.5 Bcf/d of incremental capacity.”
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