Cooling the streak of price firmness exhibited on Monday and Tuesday, natural gas cash averages across the United States dropped for the second straight day on Friday as summer-like temperatures dominated much of the country and Thursday’s news of an early start to the storage injection season began to fully sink in.
For all intents and purposes, the April natural gas futures contract took Friday off as it registered a six-tenths of a cent gain from Thursday within a narrow trading range to close at $2.275, which is 5.1 cents below the contract’s finish the previous Friday.
Unable to keep up the illusion of a price rebound that began earlier in the week, cash traders were forced to come to terms with the current bearish fundamentals. Most points across the country lightened between 10 to 15 cents, except for the West Coast, which once again saw some of the largest declines.
Southern Border dropped just over 20 cents, while SoCal Citygate and Southern California Border Average dropped just a couple of pennies less.
In the Northeast, where summer temperatures reigned supreme on a March day, Algonquin Citygate, Columbia Gas and Transco Zone 6 NY each dropped just more than a dime, while Clarington, Iroquois Zone 2 and Tenn Zone 4 200L each declined by a few cents shy of a dime.
“We’ve got too much gas and it’s just a question of how low does it go,” an eastern marketer told NGI. “I think everything flattens out, but we aren’t seeing the price response we need to shut in more gas. Until prices are a lot lower guys won’t shut in gas, but they won’t drill either.”
The marketer said producers and the industry as a whole will soon be faced with a difficult storage question. The mild winter and increased shale gas production combined to create a gas supply glut, pushing gas prices to a 10-year low. The situation isn’t getting any better, especially since the industry this year flipped from withdrawals to injections earlier than usual. An 11 Bcf injection was recorded for the week ending March 16, bringing working gas in storage to a whopping 2,380 Bcf, according to EIA estimates. Stocks are now 766 Bcf higher than last year at this time and 835 Bcf above the five-year average of 1,545 Bcf.
“There is room in storage now but there will come a point when there is no room in storage and that’s when prices will start heading south,” the marketer said. “People still have a little optimism that maybe we will have a real hot summer, but we are not at the tipping point yet. However, we are getting close.”
One market analyst said he has been hearing a lot about Permian Basin shale and the impact of wet-shale drilling and associated gas on prices for gas out of the Permian Basin. “I am hearing more and more rumblings about south Mainline as we go forward filling up a little bit more. Permian Basin may become a cheaper basin than the San Juan on a regular basis,” the analyst said. “We have been talking to El Paso and they have been getting a lot of pressure from producers to expand their intra-basin pipes to gather gas to bring it to the big pipelines. Back in the day, the Permian Basin gas was 20 to 30 cents more expensive than San Juan, but if you look at the curve now it’s like 10 cents. In the last six months Permian has been cheaper on a cash, spot basis.”
One sign of hope for price bulls is the ever declining natural gas rig count within the United States, which came one step closer to reaching a 10-year low. According to Baker Hughes Inc., U.S. active gas directed rigs for the week ending March 23 declined by 11 rigs to 652, marking the eleventh consecutive week of declines for the segment. Bulls should also be pleased to see that horizontal rigs, which are most commonly used in shale oil and gas development, dropped by six rigs for the week to 1,174.
Analysts see the market doing better than anticipated given abundant storage and mild weather. “Nonetheless, we are still viewing this week’s show of support in the next-day cash market as a pause within a long-term price decline capable of carrying Henry Hub to below the psychologically significant $2 mark,” said Jim Ritterbusch of Ritterbusch and Associates. On Friday the Henry Hub dropped 12 cents to average $2.07.
In his view, an efficient market would see cash prices “maintaining a southerly course amidst unseasonably warm temperature trends and a supply overhang that keeps expanding on a weekly basis. However, utilities appear to have been provided more flexibility than previously expected regarding their storage strategies. As a result, we feel that downside price pressures within the spot market have simply been delayed until the weather factor is further wrung out of the pricing equation.”
Citi Futures Perspective analyst Tim Evans also believes cash and futures values still have plenty of bearish pressure. “The natural gas market is…doing its best to shrug off both [Thursday’s price decline and the fundamental factors that sparked Thursday’s drop, including an 11 Bcf net injection to natural gas storage that was both larger than the consensus expectation and an early start to the normal April-October injection season,” Evans said Friday. “Warmer than normal temperatures over the next two weeks point to ongoing bearish comparisons, although the first 10 days of the forecast do look just slightly cooler than Thursday’s outlook.”
In the near term, mild temperatures are going to have to be squeezed out of the market. In its 11- to 15-day outlook, WSI Corp. of Andover, MA, said, “With the exception of the West Coast and now the Eastern Seaboard, above-, much-above-, and super-above-normal temperatures are forecast over most of the country. Anomalies as warm as 15 degrees above normal are still anticipated over the north-central U.S.”
It said Friday’s forecast “is colder along the Eastern Seaboard than it was [Thursday]” and cautioned that “temperatures may trend cooler in the Northeast than currently forecast as the medium-range models all depict a persistent or redeveloping trough becoming centered over the Canadian Maritimes in early April.”
The above-normal temperature regime that has lead to little to no heating demand, may work to elevate air-conditioning load. The National Weather Service (NWS) in its outlook for May, June and July forecasts above- to much-above-normal temperatures across a broad section of southern and eastern tier states. From Nevada to Texas to Florida to Vermont is expected to be above normal. Those forces may already be at work. For the week ended March 24, NWS shows Illinois, Ohio and Indiana receiving 13 to 15 cooling degree days (CDD), not much by cooling standards but well ahead of seasonal requirements showing no CDDs for this time of year.
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