Mother Nature delivered a gut punch to the natural gas market, pulling back on projections for a polar vortex to descend into the Lower 48 by the end of the month. The frigid forecast was seen as the missing link in an otherwise solidly supported market.
With only brief cold snaps on the radar, natural gas forward prices responded swiftly with sharp decreases in the remaining two months of winter. The losses come in spite of strong liquefied natural gas (LNG) demand and lower production. Smaller losses were seen further out the curve, NGI’s Forward Look showed.
EBW Analytics Group said the “rare loss” of a startling 35 gas-heating degree days and 70 Bcf within the near-term time frame triggered the collapse of the February Nymex futures contract, which plunged 19 cents on Tuesday (Jan. 19) alone. The prompt month held fairly steady Wednesday, but ultimately settled the Jan. 14-20 period about 13.0 cents lower than where it started. The balance of winter (February-March) was down about 11.0 cents to $2.540, the summer (April-October) was down 6.0 cents to $2.950 and the winter 2020-2021 strip was down 4.0 cents to $2.950.
The latest weather models have grown closer in alignment, with the European data trending much warmer for early February. Bespoke Weather Services said the issue is that, at these low price levels with the current supply/demand balance, the pattern “must” stay at high-end warm levels to keep further downside risks in play. Any turn back toward a more variable pattern, even if not a truly colder look, could quickly turn price action back around.
“As of right now, the warm regime appears a safe bet for early February, but we could see how tropical forcing shifts allow for some variability toward the middle of the month,” Bespoke said.
EBW said it would not be surprising to see further notable declines in the weeks ahead, “Still, even after factoring in lower demand, storage inventories remain set to drop below year-ago and five-year average levels during February, while very cold weather in Europe and Asia has supported summer LNG export expectations.”
A lot of headway was made on Friday when the Energy Information Administration (EIA) reported the largest withdrawal of the season so far. The agency reported a 187 Bcf pull from storage inventories for the week ending Jan. 15, on the higher end of a wide range of estimates ahead of the report.
The EIA released the weekly storage inventory report on Friday, a day later than usual because of the holiday and the inauguration of President Biden.
The South Central region withdrew the most from inventories, reporting a net 75 Bcf decline that included a 44 Bcf draw from nonsalt facilities and a 31 Bcf pull from salts, according to EIA. The Midwest withdrew 51 Bcf, while the East pulled 47 Bcf. Mountain stocks fell by 12 Bcf, and the Pacific slipped by 3 Bcf.
Total working gas in storage fell to 3,009 Bcf, only 36 Bcf above year-ago levels but still 198 Bcf above the five-year average, EIA said.
“The surplus is quickly being sucked up,” said The Desk’s Het Shah, managing director of online energy platform Enelyst. “As soon as we dip into year/year deficit territory, I can see the bulls jumping back on board despite the warming trend in weather.”
Ahead of the EIA report, major surveys coalesced around a draw in the upper 170s Bcf. NGI had projected a 191 Bcf pull.
Bespoke said the actual 187 Bcf figure showed how strong the balance could be with colder weather and low wind in the South. It reflected a “very tight” supply/demand balance. However, that looks to be “temporary, as demand has lessened in the South and wind is back higher as well.”
The forecaster pointed out that there was little price reaction to the upside following the report, “other than a very brief bump up that was quickly sold. We still need to see weather back away from the big warm look in order to get anything going to the upside. If we hold this warmth, or add to it over the weekend, we likely see a test under the $2.40 level early next week.”
The February Nymex futures contract went on to settle Friday at $2.446, off 4.5 cents from Thursday’s close. March slipped 4.1 cents day/day to $2.456.
“Winter price volatility, i.e. anxiety, is slowly withering away, but there’s always something on the horizon to build anxiety,” said Huntsville Utilities natural gas scheduler Donnie Sharp.
Foggy On Exports
Meanwhile, LNG demand is running rampant. Though Asian gas prices have fallen from their recent highs, demand for the super-chilled fuel remains strong. However, Wood Mackenzie noted that feed gas flows via interstate pipelines had declined by nearly 730 MMcf/d since Wednesday to 8.93 Bcf/d on Thursday based on evening cycle nominations data.
The declines were concentrated at Cheniere Energy Inc.’s Sabine Pass LNG facility, “where heavy fog has significantly affected visibility,” according to Wood Mackenzie. In the wee hours of Wednesday morning, the firm’s proprietary monitors detected five of six engines turned off at Sabine Pass Train 1. Sabine Pilots suspended service as of 4:30 a.m. CT because of fog.
“Currently, there is a high probability of fog” through Friday (Jan. 22) and a moderate chance of fog” through next Tuesday (Jan. 26), Wood Mackenzie analyst Preston Fussee-Durham said.
Regardless of the near-term hiccups, LNG demand is expected to remain strong for the remainder of winter and even through the spring and summer. Schneider Electric analyst Henry Homer said earlier this week the Asian market continued to influence European price movements. Supply concerns still linger throughout Asia given storage inventories and shipping availability. Pakistan is facing supply shortages and was reportedly considering reducing gas supplies to factories as the week got underway.
As more LNG cargoes were diverted from Europe toward Asia to match skyrocketing demand in recent weeks, European storage inventories also fell below the five-year average over the weekend and stood at 60.7% last Sunday.
However, a warming outlook for Northeast Asia in the coming weeks and a closing of the reload arbitrage may help loosen the global LNG market, according to Energy Aspects. The firm said the complete closure of the inter-basin arbitrage by April should also curb the number of U.S. shipments going to Northeast Asia, easing Panama Canal congestion and further loosening the LNG shipping market.
This lines up with Energy Aspects’ view that Northeast Asia may largely be supplied by firms in the Pacific basin and Middle East this summer, rather than calling on U.S. cargoes or European reloads. In Egypt alone, the firm said global gas price forecasts point to the netback as high enough for spot cargoes to be sold from both the Damietta and Idku LNG terminals on a free on board basis all summer.
“An 80% utilization rate at both facilities — similar to this winter at Idku — would mean about 4.5 million tons of additional global supply next summer on a year/year basis,” the firm said.
U.S. forward markets posted big losses across the front of the curve as wintertime demand has mostly fallen short. Prices for the summer and beyond also declined, but decreases were limited to around a nickel or less.
Up until a few days ago, the gas market had been expecting a polar vortex to move into the country in the final week of January, which would drive up demand and possibly linger into early February. However, weather models since have lowered the intensity and span of that Arctic blast.
NatGasWeather said the cold shot would still sweep from Western Canada across the northern United States and into the East from the coming Tuesday through Friday (Jan. 26-29). However, the weather data was bouncing between colder and warmer trends.
Still, the week ahead is “expected to bring strong national demand, even with inconsistent weather trends,” NatGasWeather said.
The period from Feb. 1-4 still “isn’t nearly cold enough,” according to the forecaster, as upper high pressure expands to cover most of the country, besides portions of the West and potentially the East. As such, those days are “rather warm/bearish weighted” because of the warming expected to take place across much of the United States.
With the peak of the winter season quickly approaching, the far less impressive blast of cold weighed heavily on forward curves. New England prices fell hardest. Algonquin Citygate’s February contract tumbled $1.180 from Jan. 14-20 to reach $4.721, according to Forward Look. March prices dropped 38.0 cents to $3.635, while the summer strip slipped only 5.0 cents to $2.390. Prices for the upcoming winter 2021-2022 fell 11.0 cents to $5.740.
Dominion Energy Cove Point also posted steep decreases at the front of the curve. February was down 51.0 cents to $3.385, and March was down 16.0 cents to $2.676. Prices for the summer were 5.0 cents lower at $2.690, while prices for the winter 2021-2022 strip were 3.0 cents lower at $3.840.
Sharp double-digit declines also were seen on the West Coast. Northwest Sumas February tumbled 40.0 cents from Jan. 14-20 to reach $2.688, while March dropped 17.0 cents to $2.502, Forward Look data showed. Summer was down 8.0 cents to $2.400, and the winter 2021-2022 was down 5.0 cents to $3.580.
Interestingly, prices north of the border in Western Canada fared much better. NOVA/AECO C prices for February fell only 6.0 cents to $2.253, while March slid 9.0 cents to $2.099. Each of the summer and winter strips were down a nickel or less.
Mobius Risk Group said year/year Canadian imports in December and January have been significantly stronger. At more than 1 Bcf/d higher than the same period last winter, the amount of gas being delivered to the Upper Midwest and West has muted the tightening supply and demand environment in those regions, according to the firm.
“If monthly and daily prices continue to support imports at recent levels, the end result will be a reduction in Canadian inventory which remain significantly higher than year-ago levels and in contrast to what has been observed in the Lower 48 despite a 100 heating degree day deficit for the Nov. 1-Jan. 19 period.”
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