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Bone-Chilling Cold Takes Toll on Production, Driving Weekly Natural Gas Prices Higher
Natural gas prices exploded higher during the Dec. 12-16 trading period amid the first intimidating cold blast to hit the Lower 48 since the start of winter. With production curtailments to boot because of wellhead freeze-offs, NGI’s Spot Gas National Avg. jumped $4.070 to $11.645.
Natural gas futures ended the week in positive territory – barely – as wild swings occurred throughout the week with seemingly every run of the weather models. At Friday’s close, the January Nymex gas futures contract settled at $6.600, up only 1.3 cents from Monday’s settlement. Notably, the prompt month had surged as high as $7.105 earlier in the week.
With frigid air penetrating the West Coast resulting in continued solid gas demand, massive price spikes continued throughout the region during the Dec. 12-16 trading week. The price gains are significant since they are on top of what were record levels the prior week.
PG&E Citygate, in the northern part of California, led the way as prices hit a fresh high of $75.00 on Tuesday. Cash prices experienced swings in both directions in the days since, ultimately averaging $8.980 higher week/week at $35.890.
Prices also were strong in Southern California, where the SoCal Border Avg. picked up $10.495 on the week to average $37.050.
The rally extended across the Desert Southwest and into the Rockies as markets throughout the western United States competed for limited supplies. El Paso S. Mainline/N. Baja cash averaged $13.505 higher week/week at $40.900. Northwest Wyoming Pool moved up $10.160 to $34.380.
As previously detailed by NGI, significant cold has slammed the region this winter. Bitter temperatures along with heavy snowfalls, gusty winds and widespread rain have fueled heating loads much earlier in the year than normal.
But Mother Nature is only one of the contributing factors that has led to the chaos in the West.
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Importantly, Pacific Gas & Electric Corp. (PG&E) in the summer of 2021 reclassified 51 Bcf of storage inventories to cushion gas, rather than working gas. Without replenishing those stocks, utilities have few molecules they can call on to meet heightened demand. But that doesn’t mean they won’t pull on what is available.
To be sure, the Pacific region pulled out a hefty 14 Bcf from storage inventories during the week ending Dec. 9, according to the latest Energy Information Administration (EIA) report. The draw sent stocks in the region down to 262 Bcf, which is 22.5% below year-earlier levels and 26.4% below the five-year average.
Meanwhile, there’s also a shortfall of pipeline capacity to move gas from the Permian Basin and the Rockies westward toward California and the Pacific Northwest. Against that backdrop, El Paso Natural Gas – the primary conduit for moving Permian gas west – has often restricted gas flows because of maintenance. The pipeline also has had a standing 600 MMcf/d curtailment in place since an explosion last year.
“The bottom line: pipeline explosions and the related extended forces majeure, not to mention old-fashioned bottlenecks, have eroded what flexibility was left,” said RBN Energy LLC’s Sheetal Nasta, managing editor.
Given that all it’s taken for West Coast prices to soar to such historic heights was a little cold weather and upstream gas limitations, gas supply constraints out West are getting worse, according to Nasta. “It’s likely the market will continue to see constraint-driven pricing during high-demand periods and during frequent outages as legacy infrastructure ages, at least until there is some relief in the way of incremental pipeline capacity.”
Elsewhere across the Lower 48, the Northeast also posted weekly price increases of nearly $10 in some locations as the cold and snow arrived on the East Coast. Cash prices at Tenn Zone 6 200L picked up $9.15 on the week to average $15.465, while Transco Zone 6 non-NY rose $6.030 to $10.520.
Looking ahead to the coming days and weeks, Mobius Risk Group said there is a very real concern being expressed in the market about access to supply during intense cold, particularly in the country’s midsection. Prices soared above $7.00 at several locations, likely a response to the ghost of Winter Storm Uri.
That said, weekly averages remained at a discount to Henry Hub. The benchmark averaged $6.760 after climbing $2.185 week/week. Most Midwest and Midcontinent prices averaged on either side of $6.000.
Futures Gone Mad
With more freezing weather on the way, and expected to intensify in the coming days, futures appropriately proved resilient this week. However, after a multi-day stretch in the green, the Nymex strip began to show signs of cracking as weather models trended warmer.
It’s not that once frigid outlooks all of a sudden have gone by the wayside. On the contrary, the period from Dec. 17-26 is expected to be especially bone-chilling, according to NatGasWeather.
The forecaster said the first in a series of frigid blasts is forecast to sweep the Lower 48 this weekend. Overnight lows are expected to range from the minus 10s to 20s across the northern half of the country, with lows of teens to 30s over Texas and the South. This weather system alone should lead to “very strong national demand,” according to NatGasWeather.
However, the second and third reinforcing Arctic Blasts expected in the coming days and seen extending into the following week are still rather intimidating even after the warmer shifts are taken into account. NatGasWeather continues to see lows drop to the minus 20s across parts of the Midwest and Plains, with the teeth-chattering conditions then spreading south and eastward. This should keep heating demand elevated.
By Dec. 28, though, the pattern looks to moderate as frigid air retreats to Canada, NatGasWeather said. The forecaster acknowledged that the pattern that far out is “far from locked and where large changes should be expected.
“But for now, the Dec. 28-31 pattern isn’t cold enough,” it said. “And, if it fails to trend colder over the weekend, this period will have a bearish lean when the natural gas markets reopen.”
That said, the recent cold snap already has made a dent in supply. Various production estimates on Friday pointed to output being several Bcf below the 102 Bcf/d mark reached in recent months.
Still, the likelihood of freeze-offs remains the predominant “known unknown” heading into the end of the month, according to EBW Analytics Group LLC. If Rockies production weathers the cold blast, it could handicap upside price risks and allow building bullish pressure on Nymex futures to relent.
“The lower-likelihood, high-impact risk, however, is for steep production freeze-offs to support an outsized near-term price move higher for Nymex futures,” EBW senior energy analyst Eli Rubin said.
How production fares would certainly impact storage as well.
After a relatively mild first half of December, storage withdrawals have eased and allowed stocks to remain very close to seasonal norms. On Thursday, the EIA reported a net 50 Bcf pull for the week ending Dec. 9 that lowered inventories to 3,412 Bcf. This is only 18 Bcf below year-earlier levels and 15 Bcf below the five-year average.
Broken down by region, the Midwest and Pacific regions led with pulls of 26 Bcf and 14 Bcf, respectively, according to EIA. East region stocks decreased by 12 Bcf, while Mountain inventories fell by 7 Bcf.
The South Central, in contrast, reported an overall increase of 8 Bcf. This included a 10 Bcf injection into salts that was partially offset by a pull of 2 Bcf from nonsalt facilities.
Looking ahead to the next EIA print, analysts are generally anticipating a more robust pull from storage that reflects harsh winter weather across the West and Midwest this week. However, expectations are modest relative to the five-year average.
Early estimates for the week ending Dec. 16 submitted to Reuters ranged from withdrawals of 44 Bcf to 101 Bcf, with an average of 89 Bcf.
For the comparable week last year, EIA posted a decrease of 60 Bcf. The five-year average is 124 Bcf.
“Substantial cold later this month may quickly absorb any surplus heading into early 2023,” Rubin said. “Still, the possibility of near-average storage levels across the three largest EIA storage regions at Christmas – with two of the five months of the traditional withdrawal season in the rearview mirror – presents a less intimidating picture of winterlong natural gas supply adequacy than national figures alone.”
Cash Prices Called Lower
Spot natural gas prices varied by region, with gains in the Midwest and Northeast but losses elsewhere and an overall decline nationally.
Chicago Citygate gained 10.0 cents day/day to average $6.320 for gas delivery through Monday. Algonquin Citygate near Boston spiked $8.680 to $17.270.
Prices across much of the West, however, posted losses after several days of robust gains. Prices nevertheless held in lofty territory.
SoCal Citygate dropped $1.535 on Friday to $34.030 and Malin fell $4.810 to $28.925.
Forecasters said that, in the near term, weather should drive strong heating demand.
Following freezing rains and heavy snow in the Midwest and East, including lows of upper teens to 30s over Texas and the South early in the coming week, another fierce Polar blast could follow late in the week. This could impact much of the country, if forecasts prove accurate, and fuel robust national demand.
Furnaces could crank as far south as Houston.
“We expect at least a couple nights of freezing temperatures” in the coming week, Space City Weather meteorologist Matt Lanza said Friday. That noted, he does not expect conditions to approach what Houston experienced during Winter Storm Uri.
“While we will continue to watch this forecast very closely, we do not believe that the intensity, duration or impacts of the cold will rival what we saw in 2021, which saw mid- or low teens for lows,” Lanza said. “Snow odds are much lower, but not quite zero.”
After gains earlier in the week, however, prices across Texas were lower Friday. Houston Ship Channel, for one, shed 82.5 cents to $4.640.
Another round of punishing, widespread cold air is expected to follow early in the final week of December. However, NatGasWeather said temperatures are expected to “moderate” Dec. 27-30 to seasonal norms, with highs of 20s to 40s over the northern United States and 50s to 70s across the southern half of the country.
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