After sliding for much of the month, natural gas forwards rocketed higher during the Sept. 17-23 period as export demand steadily increased and on cooler changes to the long-range forecast. October prices jumped an average 17.0 cents during that time, while November launched 23.0 cents higher on average, according to NGI’s Forward Look.
Strong, double-digit gains extended throughout the winter months, with the full November-March strip averaging 14.0 cents higher amid projections for lower production and stronger demand in the Lower 48 and abroad. Summer prices also increased, but gains were small, as were those seen further out the forward curve.
The overall gains were impressive, especially when considering the path to achieving them.
“Why such irrational trade the past month is difficult to pinpoint, but daily changes in liquefied natural gas (LNG) feed gas, production, and weather have certainly increased volatility,” said NatGasWeather. “In addition, the expiration of October 2020 options Friday and futures Monday are likely contributing to this week’s volatility.”
After the Energy Information Administration’s (EIA) Sept. 17 storage report reignited fears of containment next month, the October Nymex futures contract plunged 22.5 cents to settle at $2.042/MMBtu. The sell-off then continued earlier this week, helped in part by extremely weak spot market demand. In addition, LNG demand was still down at the Cameron export facility following Hurricane Laura, and demand was reduced at Sabine Pass and Freeport because of Tropical Storm Beta. Cash prices also weakened considerably, “further amplifying bearish qualms,” according to EBW Analytics Group.
Meanwhile, October’s $1.835 closing price on Sept. 22 was the first time since early August that the prompt contract had settled below $2.00. However, with a failed attempt to break through technical support around the $1.810 mark, futures exploded higher and October settled Wednesday at $2.125. The November contract soared to $2.794.
“I warned that a failure to break support had the potential to trigger a violent snap back to the upside,” said ICAP Technical Analysis’ Brian Larose. “While we did get the snap, the bulls did not do enough to signal they are back in control.”
Larose said bulls must push November prices first into the $2.894-2.905 range, then to $2.927-2.956 and finally to the $3.002-3.0330 in order to start “raising the bar.”
The latest EIA data prompted a step in the right direction. On Thursday, the EIA reported that 66 Bcf was injected into storage inventories for the week ending Sept. 18. The build was below even the smallest of estimates ahead of the EIA report and was bullish to both the year-ago 97 Bcf injection and the five-year 80 Bcf average, according to EIA.
Bespoke Weather Services said it was unclear whether there was an implicit “make-up” in the latest EIA data. The prior week included a holiday, and LNG also was higher. “Either way, this number reflects very tight balances, the tightest we have seen in our data all summer long.”
Tudor, Pickering, Holt & Co. (TPH) analysts said there was “extra scrutiny” in the latest EIA data, “but order has been restored” as the 66 Bcf build aligns with their supply/demand model, which pointed to a 65 Bcf build. This also suggests the prior week’s surprise build was “a one-off event.”
Broken down by region, both the East and Midwest added 26 Bcf to inventories, while South Central stocks rose by 7 Bcf, all at nonsalt facilities, EIA said. Salt inventories were unchanged at 349 Bcf.
“Salt holders look to be saving their last few bullets for lower cash,” said The Desk’s Het Shah, managing director of online platform Enelyst.
Total working gas in storage rose to 3,680 Bcf, which was 504 Bcf above year-ago levels and 407 Bcf above the five-year average, according to EIA.
The TPH team said the risks around storage “can be put to bed” as regional balances look like “they will sneak by” but, more importantly, the October contract is about to expire, shifting focus firmly into withdrawal season.
“On that note, LNG demand is one variable we’ll be watching closely as the run to 8 Bcf/d was quickly deflated by the arrival of Beta,” taking the past week’s average feed gas demand down to around 5.5 Bcf/d, TPH analysts said. However, recent flow data has shown meaningful rebounds from Sabine Pass and Freeport, pushing feed gas demand north of 6 Bcf/d.
The firm expects feed gas flows to U.S. LNG terminals to range between 6 and 7 Bcf/d until Cameron begins ramping up again, which it expects to start in early October. Looking ahead to the next EIA storage report, TPH’s early modeling points to a 75 Bcf build, which is slightly below the five-year average of 80 Bcf.
Bespoke said while the next EIA figure is expected to be looser thanks to lower LNG volumes, “this tells us how tight we can be when LNG volumes are strong.”
The October Nymex went on to gain another 12.3 cents on Thursday to settle at $2.248.
An early blast of crisp air could set the tone for what is expected to be a colder winter year/year. While too early to be considered bullish, an impressive shot of early chill is set to sweep across much of the nation east of the Rockies by the middle of the week, according to NatGasWeather.
The latest Global Forecast System added a little demand for the 11- to 15-day period, but it’s still to the bearish side with comfortable temperatures favored for most of the United States, the forecaster said. “But again, the 11- to 15-day period is susceptible to further cooler trends in time, especially across the northern and eastern U.S.”
However, if weather forecasts shift back to reflect a warmer northern tier, the optimism expressed the past couple of days could immediately dry up, according to Mobius Risk Group. The first test of how buoyant the market can remain should be provided over the next week as weather is expected to remain mild and the next EIA report should be scrutinized for confirmation of a burgeoning trend or offer a pause for reflection.
Mobius also noted that the total degree day count referenced in the latest EIA report is very similar to that of the upcoming report and the one thereafter. However, there is a distinct difference in that Thursday’s report had a reference week with warmer-than-normal temperatures in the Southeast and cooler-than-normal temps in the North, while the next reporting period would reference a week that was broadly cooler in the East, including the Southeast and Gulf Coast and warmer in the West.
“In summary, the market is not definitely out of the woods just yet,” Mobius said.
Meanwhile, EBW analysts warned that even if temperatures drop earlier than usual, more people working remotely may lead some cost-conscious customers to wait for colder temperatures to turn on the heat. The magnitude of the impact is unclear, but analysts said a slower-than-expected start to the heating season increased the risk of an early-November injection and could defer upside pressure for Nymex winter gas contracts.
By mid-November, however, the market is expected to shift from near-term storage overflow concerns to potential undersupply in a cold winter scenario, according to EBW. The end-of-March storage trajectory in the most-likely scenario remains slightly shy of 1,200 Bcf, roughly 150 Bcf below the typical early-winter market trajectory.
“If there is a cold burst in late October or early November as occurred in each of the past two years, reliability-focused local distribution companies have to plan for a worst-case scenario from a supply adequacy standpoint, lifting natural gas prices sharply higher to reduce price-induced coal displacement,” EBW said.
Regardless, the recent volatility along the Nymex futures curve is likely to stay for awhile, according to analysts. Wild swings over the past couple of months reflect the difficulties the market is having in accurately pricing natural gas, EBW said.
Indeed, Nymex futures fluctuated in and out of positive territory throughout Friday’s session, but aggressive selling in the last half-hour of trading sent the October contract plummeting back down 10.9 cents to $2.139. November dropped 9.2 cents to $2.807.
The bottom line, according to The Schork Group, is that the sudden spike in the October contract was “impossible to justify.” Noting the typical volatility that arises when options and futures expire, the analytics firm said that underground storage is on pace to finish at the highest level for the month of September on record.
“What is more, we are of the strong, nay, herculean opinion that we will begin the heating season with a record amount of gas — well above 4.0 Tcf — in the ground.”
Extreme summer weather was refusing to loosen its grip on the West Coast, with temperatures forecast to remain in the 90s and 100s through the end of the month.
What’s worse, a cold front in store for the Pacific Northwest in the coming days could spawn winds farther south of the system, potentially sparking new fires across California. So far this year, more than 5,500 homes and businesses and 3.4 million-plus acres have burned as a result of the 7,900 fires across the state, according to the California Department of Forestry and Fire Protection.
“By late this weekend and into next week, a large heat dome is expected to build over the West,” said AccuWeather meteorologist Ryan Adamson. “This will mean the region will be dry, and it will likely be until at least some time in October before the entire West will be in line for any chance of widespread precipitation.”
With no signs of cooler weather yet in the forecast, forward prices across the West rallied strongly during the Sept. 17-23 period, according to Forward Look.
In the Pacific Northwest, Northwest Sumas October prices shot up 61.0 cents to $2.659, about 20 cents higher than cash prices for gas delivered Thursday. Sumas’ November contract jumped 32.0 cents to $3.655, while the full winter strip rose 21.0 cents to $3.980. Summer 2021 prices climbed a much more modest 7.0 cents to $3.590, and winter 2021-2022 picked up 9.0 cents to reach $3.090.
In Northern California, PG&E Citygate October rocketed 58.0 cents higher from Sept. 17-23 to reach $3.891, a more than 10-cent premium over cash, and November moved up 41.0 cents to $3.915, Forward Look data showed. Winter prices averaged 23.0 cents higher at $4.01, while next summer bumped up only 4.0 cents to $3.44.
The SoCal Citygate forward curve experienced similar behavior, with the October contract jumping 67.0 cents during the period to $3.208, a roughly 35-cent premium over spot gas prices for Thursday delivery, according to Forward Look. November shot up 32.0 cents to $3.817, winter tacked on 19.0 cents to $4.410 and the summer 2021 strip edged up 4.0 cents to $3.440.
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