On a day of heightened volatility, the January Nymex natural gas futures contract rebounded sharply ahead of expiration as robust liquefied natural gas (LNG) demand took center stage. Though a full recovery from Monday’s steep sell-off proved difficult, the January contract expired a whopping 16.2 cents higher at $2.467. The February contract, which takes over the prompt position on Wednesday, jumped 11.8 cents to $2.444.
Spot gas prices were mixed, but several locations across the country posted double-digit gains. NGI’s Spot Gas National Avg. ultimately slipped 1.0 cent to $2.525.
Whether Tuesday’s swift turnaround in the futures market is warranted is up for debate. That’s primarily because nothing much has changed on the weather front. The latest weather models still don’t show potential for sustained widespread cold until Jan. 12 at the earliest, according to NatGasWeather.
The firm said the midday Global Forecast System model held a warmer-than-normal pattern for the coming 15 days, with only the western United States to see weather systems considered cold enough to induce stronger demand. Even then, any boost in demand would be marginal.
“We continue to look to Jan. 12-15 as the next best opportunity for more impressive cold shots to arrive into the U.S., and it will need to if weather patterns are to finally take advantage of a tighter year over year supply/demand balance,” NatGasWeather said.
The forecaster said Tuesday’s gains are likely because of other reasons, including the January contract’s expiration. “Or, it could simply be a technically oversold bounce after prices plummeted more than 30 cents in less than 24 hours of trading.”
The ill-timed span of warm weather is set to occur as the clock ticks away on the remaining storage withdrawal season. When taking into account actual weather over the Christmas holiday, forecasted weather changes through Jan. 7, and newly instituted forecasts for Jan. 8-11, Mobius Risk Group said the change in the cumulative population-weighted heating degree days equates to the loss of roughly 175 Bcf of demand.
“This weather change, if realized, will have eliminated the possibility of a 200 Bcf or greater withdrawal until late January,” the Houston-based firm said.
The Energy Information Administration (EIA), scheduled to release its weekly storage inventory report at the usual 10:30 a.m. ET Thursday time this week, said stocks fell by 152 Bcf for the week ending Dec. 18. Despite being a triple-digit draw, the figure disappointed the market, which was expecting a pull closer to 160 Bcf. Furthermore, the latest draw still left inventories at a hefty 278 Bcf surplus over year-ago levels and a 218 Bcf surplus to the five-year average, according to EIA.
Mobius said it’s important to consider the ramifications of another deep dive in prices like the one experienced on Monday. The firm said that while there may be some incremental demand gains in the power sector if prices stay closer to $2.25 at the front of the curve, it would pale in comparison to weather-driven residential and commercial losses.
“It will be important to closely follow daily and weekly supply and demand data points in the Southeastern U.S., including Texas, as this is a region capable of quickly absorbing additional supply when prices move from $3.00 down to $2.50 and below,” Mobius said.
Production is not likely to be materially impacted, according to the firm, unless spot prices in Appalachia get hit by another 25-50 cents, or in the event of newfound pressure in the domestic crude market. Meanwhile, downstream markets for U.S.-sourced LNG remain strong, so there is little reason to expect a material change in the appetite for exported cargos, Mobius said.
The continued hunger for U.S. molecules is what is keeping Tudor, Pickering, Holt & Co. (TPH) optimistic that prices could still recover north of $3.00. Rolling the warmer forecasts into their supply-demand model, TPH analysts see end-of-winter storage at 1.9 Tcf and peak storage increasing to 4.0 Tcf. However, a meaningful offset is expected from power generation as the current $2.50 strip drives roughly 1.5 Bcf/d of coal-to-gas switching versus its prior forecast that was run on an early-December strip of $2.80.
“Factoring in this offset, our end-of-season storage forecast moves to 1.75 Tcf, with October peaking at 3.45 Tcf, which is 8% lower than the five-year average,” TPH said.
But the kicker is LNG utilization, according to the analysts.
Strong Asian demand has resulted in European imports dropping 38% year/year through November and December, a trend TPH expects to continue well into the New Year as the February spread between the Japan Korea Marker and the Dutch Title Transfer Facility currently sits at $4.75. As a result, the TPH team expects European storage to draw down around 600 Bcf below last year’s level, opening up an opportunity for U.S. LNG utilization to push 90% through 2Q2021/3Q2021 versus the firm’s prior expectation of 65%.
“At 90% utilization, our end-of-October storage projection falls to just 3.0 Tcf, which is around 20% below the five-year average,” TPH said. Furthermore, it would expect pricing to rise to about $3.10 to balance the market through gas-to-coal switching.
“All said, there are still plenty of chips to fall this winter but even under a weak weather scenario, we think $3.00 for fiscal year 2021 is still in play and see attractive asymmetry in the current forward curve,” TPH said.
Spot gas prices were mixed on Tuesday as several weather systems were tracking across the country.
For those markets that ended in the black, gains were in the double-digits. Midwest prices were generally higher by 10.0 cents or more. Consumers Energy next-day gas climbed 11.0 cents to $2.270.
The National Weather Service (NWS) said an amplified upper-level trough is forecast to split and stretch the surface low pressure system out from the Central Plains and into the Great Lakes region. Heavy snow is expected to spread from the Great Plains into the Upper Midwest/Great Lakes through Wednesday, where 4-8 inches of snow is likely with the possibility of localized amounts exceeding 8 inches.
Heavy snow is likely to develop over western Texas on Thursday as cold air surges south on the backside of the system, according to NWS. Between 4-8 inches of snow is likely to fall over this area through Thursday.
“As the upper-level trough splits into two distinct pieces of energy, the northern stream will weaken while the southern stream develops a new system over the Southern Plains,” the forecaster said.
The northern stream is expected to produce some snow and rain over the Lower Great Lakes and Northeast into Thursday, while the southern stream is likely to continue pulling Gulf moisture and producing heavy rain from the Southern Plains to the Lower/Middle Mississippi and Tennessee Valleys, according to NWS. Meanwhile, heavy snow and rain may impact the Pacific Northwest as a deep area of low pressure approaches the region, with up to 2 feet of snow possible over parts of the Cascades and around a foot of snow likely over parts of the Northern Rockies.
Elsewhere across the Lower 48, prices across Louisiana moved higher. ANR SE led the way with an 18.5-cent climb to $2.335 after the pipeline declared a force majeure because of a potential unplanned outage at the Jena, LA, compressor station on the Southeast Mainline.
Genscape Inc. said as a result of the force majeure, southbound capacity through Jena would be reduced by 260 MMcf/d to 920 MMcf/d for Dec. 30 and 31.
“This outage will impact 125 MMcf/d of flows compared to the 30-day average and 250 MMcf/d compared to the 30-day max, bringing bullish pressure to ANR Southeast prices,” said Genscape analyst Josh Garcia.
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