Natural gas futures rallied for a fourth consecutive day, reaching a new 2021 high on Friday as the vast majority of Gulf of Mexico (GOM) production remained offline in the wake of Hurricane Ida and traders continued to mull supply/demand imbalance concerns.

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At A Glance:

  • Futures hit highest level in nearly three years
  • GOM production remained light after Ida
  • Cash prices held strong in the West

The October Nymex contract gained 7.1 cents day/day and settled at $4.712/MMBtu, the highest mark for a prompt month since November 2018. The November futures contract rose 7.0 cents to $4.762.

Cash prices were mixed, with ongoing gains in the West but declines in the Northeast. NGI’s Spot Gas National Avg. shed 6.0 cents to $4.420.

An estimated 89% of natural gas production in the GOM was still shut in as of midday Friday, according to the U.S. Bureau of Safety and Environmental Enforcement. Oil and gas drillers worked throughout the week to restore production in the GOM after Ida blasted Louisiana as a Category 4 hurricane on Aug. 29. However, lingering power outages and challenges imposed by flooding hampered efforts, leaving analysts to anticipate full restoration could take weeks.

With production already modest ahead of the storm – around 92 Bcf/d, a full 1 Bcf/d below highs earlier in the summer – markets grew increasingly concerned that natural gas supplies may fail to keep pace with domestic needs as the peak winter demand season approaches. Production hovered below 90 Bcf/d through most of the week following Ida.

At the same time, supplies in Europe and Asia are also light, intensifying demand for U.S. exports of liquefied natural gas. Exports to fuel energy needs abroad are soaking up supply and punctuating imbalance worries.

All of this was amplified by the latest the U.S. Energy Information Administration (EIA) inventory report. The agency on Thursday reported a 20 Bcf injection into Lower 48 gas stocks for the week ended Aug. 27, a bullish print versus expectations. Major surveys had landed at a median of 25 Bcf. The five-year average increase was 53 Bcf.

Analysts at the Schork Report said the “dismal” build was 10 Bcf lower than the previous record low of 30 Bcf, set in 2017, for the corresponding week.

Inventories ended the Aug. 27 period at 2,871 Bcf, versus 3,450 Bcf in the year-earlier period and a five-year average of 3,093 Bcf.

The EIA print “suggested the supply and demand balance is tighter than anticipated, with deficits increasing to 222 Bcf,” NatGasWeather said. “…This isn’t a huge supply deficit when considering the last time prices traded over $4.50, deficits were more than 600 Bcf. With that said, deficits will continue to increase unless stronger U.S. production occurs to help loosen the balance.”

“Tightness in the South Central region remains the story du jour, with the 22 Bcf draw significantly tighter than the five-year and widening the gap to the five-year average to 9% at 948 Bcf,” analysts at Tudor, Pickering, Holt & Co. (TPH) said of Thursday’s EIA data. GOM shut-ins are bound to further impact “balances even as power generation demand trends lower seasonally” as fall weather gradually settles in, the analysts said.

Overall, Wood Mackenzie analyst Eric Fell said that, compared to degree days and normal seasonality, the latest injection was tight by 2 Bcf/d versus the five-year average. “This has been a common theme this summer, with eight out of the last 13 weekly reports tight on a weather adjusted basis by at least 2 Bcf/d.”

Balances could get a near-term assist from cooler weather in the days ahead. National demand was expected to remain strong early in the week with highs in the 90s across much of the western and southern United States — and temperatures approaching 100 in parts of Texas. Still, NatGasWeather said Friday “more fall-like cool fronts are expected into the Midwest and East” as the week wears on, “with highs of 60s to lower 80s to ease national demand back to seasonal levels.”

Cash Varies

While temperatures could step down in the days ahead, spot gas prices advanced in a majority of regions Friday as summer heat continued to bake swaths of Texas, the Plains, California and the Southwest. Highs climbed into the 100s in Las Vegas, Phoenix and Palm Springs, CA, National Weather Service data showed. 

Ida left in its wake cool air across the Northeast, however, easing gas demand in that key region. Algonquin Citygate near Boston fell 47.0 cents to $3.430 and Iroquois Zone 2 in New York lost 25.0 cents to $3.950.

These declines were offset by surges out West. SoCal Citygate jumped 51.0 cents to $5.990, while KRGT Del Pool gained 42.5 cents to $5.535 and El Paso S. Mainline/N. Baja rose 32.5 cents to $5.960.

A combination of strong demand and insufficient pipeline capacity that constrains supply kept upward pressure on prices in the West throughout the summer, and that continues to be the case early in September, said RBN Energy LLC analyst Jason Ferguson.

The lofty prices are “signaling the need for construction of newbuild gas pipeline capacity to the region. Without it, markets west of the Permian Basin have been hard-pressed to take advantage of the supply growth in West Texas and have struggled to consistently maintain adequate natural gas supplies for some time now,” Ferguson said.

To make matters worse, he added, last month a segment of El Paso Natural Gas Pipeline, “a primary artery for moving Permian gas west, experienced a rupture, further tightening supplies.” Looking out to the middle of September, NatGasWeather said strong cooling demand was expected to continue in the West and much of the South. However, “the northern U.S. and much of the East will be near perfect with highs of 70s