Following last Friday’s sell-off, natural gas futures gave up further ground Monday on modestly cooler weather forecasts and lingering concerns about the coronavirus pandemic and its impact on industrial energy demand. Persistently low liquefied natural gas (LNG) volumes also continued to weigh on markets.
The July Nymex contract settled at $1.669/MMBtu, down 6.2 cents day/day, falling to its lowest level to date this month. August declined 5.5 cents to $1.760.
NGI’s Spot Gas National Avg. declined 5.5 cents to $1.415.
While temperatures remain consistently hot across Texas and southwestern states, parts of the West and East could see cooling, with increased heat expectations pushed to late June from earlier forecasts that called for higher temperatures this week, according to NatGasWeather.
“A weather system will stall over the East this week with heavy showers and thunderstorms, [and] comfortable highs of 70s and 80s,” the firm said. “A cooler system will track into the Northwest and Rockies with highs of only 50s to 70s, although too late in the season for meaningful heating demand. In between these two systems, hot high pressure will bring regionally strong demand to Texas, the Southwest and Plains, as highs reach the 90s to 100s.
“Overall, national demand will be light this week due to the northern and eastern U.S. being mostly comfortable,” NatGasWeather added. “Bears have regained momentum. For bulls to regain control, a hotter weather pattern and stronger LNG feed gas/exports will likely be required.”
Amid the economic recession, energy use is weak across Europe and much of Asia, dampening demand for LNG imports from the United States.
At the same time, domestic industrial demand is returning only gradually alongside modest and spotty gains in economic activity as coronavirus-related restrictions ease. “We’ve still yet to recover any additional demand from the shut-downs, with industrial demand lagging,” Bespoke Weather Services said.
Many economists have said that while the U.S. economy could bounce off the lows it hit in April, as evidenced by job gains and a reduction in the unemployment rate in May, a full recovery that would drive strong consumer activity — and energy demand along with it — may not take hold until a vaccine for Covid-19 is developed and widely distributed.
“Yes, you have states opening back up their economies, and there is some progress, but until the pandemic is solved, the economy won’t return to normal as we knew it,” economist Kevin Jacques of Balwdin Wallace University in Ohio, told NGI. “We have very high unemployment still. A lot of people can’t afford to go out and spend even if they felt safe doing so. And many other people who could afford to, for their own health reasons, just don’t feel safe and probably won’t until there is a vaccine.”
The lack of activity is creating imbalance concerns as signs of supply increases pop up. Analysts at Tudor, Pickering, Holt & Co. (TPH) said basin-level data point to associated gas volumes increasing, up 1.2 Bcf/d off the bottom, as oil drilling resumes, led by activity in the Permian Basin and in the Midcontinent.
“In aggregate, U.S. gas flows currently sit at 90.4 Bcf/d, up 2.4 Bcf/d from the trough of 88.0 Bcf/d,” the TPH analysts said Monday. “Of the 2.4 Bcf/d volume increase, core associated basins account for 1.2 Bcf/d of the increase, while Marcellus accounts for the largest portion of the remainder, recovering 0.5 Bcf/d from the low point. All told, we expect to see volumes continue to trend higher over the coming weeks as more shut-ins return to market, putting added pressure on an already stressed gas market.”
EBW Analytics Group noted that the latest Baker Hughes Co. report showed a two-rig increase in gas-directed rigs last week, both in the Haynesville Shale. The gains lifted the count to a three-week high of 78 rigs.
“In Appalachia, however, both the Utica and Marcellus rig counts remain pegged at their lowest combined level since at least 2011,” EBW said, making it difficult to predict long-term production momentum. “While gas output may bounce higher this summer as curtailments are lifted and shuttered oil wells restarted, if the current investment drought in new production continues, the natural gas market may be vastly undersupplied” by 2021.
Moreover, on the demand side, long-range weather forecasts still show intensifying heat by late June across most of the Lower 48, Bespoke noted.
“We still expect the balance of summer to be hot as we push more into a La Niña base state, which could be the wildcard needed to mitigate containment risks via stronger power burns,” the firm said. “That keeps us with a bullish lean longer term. Should the hotter summer idea fail, the door would be more wide open for containment and a crash of front-month prices.”
With only a few exceptions, spot gas prices declined throughout the Lower 48 Monday amid the forecasts for cooler near-term conditions.
On the pipeline front, Texas Eastern Transmission last Friday issued updated operating conditions that take effect between June 23 and June 25. Most important, Genscape Inc. said, “is that eastbound capacity into M3 will be significantly reduced…This will add significant bullish pressure to M3 prices if the constraints still exist during peak summer demand.”
Separately, Columbia Gas Transmission has planned pigging on its MXP Line 100 in West Virginia starting Tuesday, with restrictions affecting the Tuesday and Thursday gas days and the gas days for June 23 and 25. The “most impactful day of restrictions,” which is Thursday (June 18), “we could see flow cuts of up to 620 MMcf/d,” Genscape estimated.
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