NGI Mexico GPI
Natural gas futures crept up early Tuesday and hung on to a narrow advance on the day as heat took hold in the West and weekend weather forecasts trended modestly warmer, creating potential for increased air conditioner use that could begin to offset weakening demand for U.S. exports. The July Nymex contract settled at $1.777/MMBtu, up three-tenths of a cent day/day. August rose a half-cent to $1.876.
Spot gas prices, meanwhile, climbed across the country, with NGI’s Spot Gas National Avg. up 10.5 cents to $1.605.
For several trading days across May and into June, traders have fixated on lower output from exporters, with coronavirus pandemic-related plunges in economic activity in Asia and Europe curbing demand for U.S. liquefied natural gas (LNG).
“The market has, in our view, shrugged off the massive decline in LNG,” Bespoke Weather Services said, indicating some sentiment that impacts of “the sharp decline may be short lived.”
Additionally, summer weather and a gradual pickup in economic activity as states ease virus-related restrictions could lead to increased demand for a range of services and the energy to fuel it, including gas to power air conditioners during peak months.
“Things are coming back — gradually — but they are coming back,” said trader Mike Matousek of U.S. Global Investors Inc. He told NGI the trend should continue, barring protracted fallout from the protests that have gripped dozens of American cities for the past week or a resurgence of the virus.
Even with the gains, LNG demand woes continued to cast a cloud over markets, keeping price gains in check. Global LNG consumption is forecast to decline 2.7% over the summer months, Wood Mackenzie Ltd. researchers said in note Tuesday. Should that prove true, it would mark the first seasonal demand contraction in eight years.
First quarter demand from Japan, the world’s largest LNG importer, dropped in the first quarter and imports continued to fall through April as lockdown measures took hold to slow the spread of the coronavirus. Wood Mackenzie said Japan entered 2020 with already high LNG inventory levels, which exacerbated the bearish demand picture.
First quarter consumption surged in India, another vital source of LNG demand, but Wood Mackenzie expects a second quarter reversal as virus-related lockdowns curb demand. The firm estimated that India’s LNG demand in 2Q2020 will plunge 24% from the same period a year earlier.
Stay-at-home orders elsewhere in Asia and across Europe, along with elevated storage levels, also are hindering demand for U.S. exports, analysts say.
Wood Mackenzie research director Robert Sims anticipates modest improvement with the coming winter season. However, “in general, a return to stronger growth is not expected until mid-2021.” Still, should “any kind of robust rebound” in LNG demand from key countries in Asia materialize, “then a price correction could begin earlier” and “reduce the risk of further U.S. supply reductions next year.”
EBW Analytics Group CEO Andy Weissman in a report Tuesday said he expects LNG exports in June to “significantly” trail May levels, as overall uncertainty regarding domestic gas production continues to permeate markets.
He noted steep curtailments of U.S. oil production in April and May, following the onset of the pandemic and a plunge in oil prices, which scaled back associated gas production, limiting supply and, at least initially, supporting gas prices. Associated gas fell at least 2.25 Bcf/d over the past two months and in mid-May, Appalachian producers trimmed nearly 1.5 Bcf/d, Weissman said.
However, as crude prices begin a slow recovery, increased oil production could materialize through July, bringing with it more associated gas, according to Weissman. Furthermore, summer heat could boost gas prices in the Northeast, enabling curtailed dry gas production to also be brought back online.
“This could result in gas production rebounding by as much as 2-2.5 Bcf/d by late July, even after netting out the impact of a steep drop in new well completions in the oil plays,” Weissman said. “If LNG feed gas flows are severely depressed during the same period, natural gas storage injections could remain high all summer.”
The next two weeks could see considerably more price volatility than normal, according to Weissman. “Two major pieces of the supply/demand balance are in play at once.”
Spot gas prices traded up across the country.
NatGasWeather said heat would continue across Texas, the South and Southeast, with highs in the 80s and into the 90s, and with even hotter conditions in most of California and across the Southwest. The Midwest and Northeast are expected to warm into the 80s as the week progresses, the firm said, describing overall conditions as warm enough to drive “moderate demand” but “not quite strong enough” to push spot prices substantially higher across the board.
Of note, newly named Tropical Storm Cristobal is expected to hover over the southern Gulf of Mexico for the next few days before moving north to the Gulf Coast, according to the National Oceanic and Atmospheric Administration.
“These types of systems tend to be bearish due to demand destruction through showers and cooling weighing more heavily than production losses,” NatGasWeather said. The firm indicated it could get hot enough by around mid-June to boost gas demand. “Until then, we continue to view patterns as not quite impressive enough.”
On the pricing front, SoCal Citygate spot gas jumped 27.0 cents day/day to average $2.460.
In addition to warmer weather, Southern California Gas (SoCalGas) on Monday started a two-month planned maintenance project that is expected to disrupt about 150 MMcf/d of flowing supply at the California-Arizona border.
“The impact from this event can be mitigated from increased receipts at Kramer Junction, which has so far picked up about half” of the losses caused by the SoCalGas project, Genscape Inc. said in a report.
In the Midwest, prices at Chicago Citygate increased 10.5 cents to $1.645.
In other pipeline news, beginning Wednesday, Columbia Gulf Pipeline plans a casing project on its ML-200 and ML-300 lines, according to Genscape, and work is expected to last until June 16. During that window, the firm estimated that gas flows out of Tennessee may be impacted by as much as 111 MMcf/d.
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