Natural gas exports, hammered by Hurricane Laura only days after reaching levels not seen since pre-Covid-19, were at the forefront of a steep decline in October forward prices during the Aug. 27-Sept. 2 period. The rest of the forward curve fared better, however, as the potential for further production decreases and stronger global demand this winter lifted prices, according to NGI’s Forward Look.
October forward prices tumbled an average 19.0 cents for the six-day period, but the winter 2020-21 strip climbed 8.0 cents on average. Summer 2021 gained an average 5.0 cents and prices for the winter 2021-22 tacked on an average 4.0 cents.
“We have seen wild volatility in natural gas prices each day” over the past week, Bespoke Weather Services said. The market finds itself in a “unique situation” in which the fundamentals are bearish at the front of the curve, but still bullish winter into Calendar 21.
Indeed, October Nymex futures have routinely fluctuated in wide ranges of more than 10 cents on a daily basis over the past week. Daily price settles also have been erratic, with analysts finding little reason for some of the big moves experienced.
When the dust cleared, the October Nymex contract was down 22.0 cents from Aug. 27-Sept. 2 to $2.486. The November contract, however, slipped only a penny to $2.931. The winter 2020-21 strip climbed 6.0 cents to $3.240. Smaller gains were seen further out the curve.
“We likely see volatility continue, as this is a paradigm we have not seen in the past, and leaves everyone unsure of where ‘fair value’ lies,” Bespoke said.
Category 4 Laura crashed ashore Lake Charles, LA, one week ago, directly hitting the Cameron liquefied natural gas (LNG) export terminal and narrowly missing the Sabine Pass facility by a mere mile. Neither facility sustained any significant damage, and futures traders latched onto the thinking that export demand would soon resume.
However, widespread power outages still remain in the region, according to the Department of Energy. Entergy Corp. also reported Thursday that more than 88,000 customers were without power in Calcasieu Parish, LA, and nearly 2,000 customers had no power in Cameron Parish. In the update, the utility said for customers in those parishes, restoring power may take longer than expected as a result of extensive damage to transmission lines serving the area.
“We have found damage to approximately 1,000 transmission structures, 6,600 broken poles, 338 miles of wire and nearly 3,000 transformers,” Entergy said. “Due to this damage, the transmission and distribution systems will require nearly a complete rebuild in this area. As more generation and transmission services are available in Southwest Louisiana, this should help improve our ability to finalize our restoration efforts.”
Cameron and Sabine Pass had not indicated Thursday whether they had power.
The uncertainty delivered a gut punch to the market that had grown confident in increasing export demand amid Covid-19. Before Sabine Pass and Cameron shut down operations ahead of Laura’s landfall, total feed gas deliveries to U.S. terminals were back above 5 Bcf/d. Still about one-half the total U.S. export capacity, the deliveries are still considerably more than the sub-3 Bcf/d levels this summer.
“Until a clearer timeline becomes available for LNG terminal restart, trading is likely to remain volatile, with the potential for the October contract to plunge further if restart is substantially delayed — or rebound quickly if feed gas starts flowing in the next few days,” EBW Analytics Group said.
Storage Still Concerning
Storage remains a going concern and threatens the front of the curve if builds ramp up over the final two months of the injection season, which ends Oct. 31.
On Thursday, the Energy Information Administration (EIA) reported a 35 Bcf injection that trimmed the stout surplus to the year-ago level. Although the reported build was seen as neutral, Bespoke said supply/demand balances were still loose enough to be quite “dicey” at the front of the Nymex curve, “while not invalidating any bullish winter case even if we do run into some containment issues.”
Ahead of the EIA report, a Bloomberg survey produced estimates ranging from 29 Bcf to 43 Bcf, with a median of 37 Bcf, while a Reuters poll spanned 25 Bcf to 43 Bcf and showed a median injection of 35 Bcf. NGI estimated a build of 32 Bcf.
Broken down by region, Midwest inventories rose by 20 Bcf, while East stocks climbed 14 Bcf, according to EIA. The Pacific continued to withdraw given ongoing heat in the region, pulling out 2 Bcf from inventories. In the South Central region, nonsalts added 6 Bcf, while salts withdrew 3 Bcf. This resulted in a net 2 Bcf injection into inventories, EIA said.
Total working in storage as of Aug. 28 stood at 3,455 Bcf, 538 Bcf higher than last year and 407 Bcf above the five-year average.
Though not much was read into this week’s report, more important will be the next several EIA datasets, according to Bespoke. The current pivot in near-term weather outlooks does not bode well for gas bulls who had expected injections to be smaller than normal. The latest weather models have moved into convergence in showing a “rather tame” demand pattern for the next 15 days, according to Bespoke.
Models, especially the American ensemble, still advertise that more heat may return to the eastern half of the nation later in the month. However, this likely won’t move the needle much unless the South also is hot, “which is not yet showing up in the data,” the forecaster said.
Stronger Pricing Ahead
There are still several moving parts that could throw October gas pricing off the rails in the coming weeks, but there appears to be more confidence in what the fair value is for contracts beyond the prompt month. Gas production, already well off late 2019 highs because of the oil market downturn, is set to decline further as rig activity has been slashed.
Last Friday (Aug. 28), Baker Hughes Co. said the total U.S. rig count held steady at 254, with three gas rigs added and three oil-directed rigs exiting the patch for the week. The total number of rigs is still 650 behind the 904 rigs active in the year-ago period.
Enverus said the industry as a whole has not registered much of a recovery in drilling activity since the end of June. Even in the most active region, the Permian Basin, activity as of Thursday was down around 1% compared to June 30.
However, an improving gas price outlook has revived activity in the Haynesville Shale, while ongoing weakness in natural gas liquids pricing has led to further pullback in the Northeast, according to analysts.
“In the two major gas producing regions, it’s two different stories,” the Enverus team said.
During a second quarter earnings call, management for Goodrich Petroleum Corp. touted the improving gas price outlook as a reason to build its growing leasehold in the Haynesville.
On the opposite end of the spectrum, Appalachian pure-plays Antero Resources Corp. and CNX Resources Corp. said during their 2Q2020 earnings calls activity would remain subdued through most of the year.
Meanwhile, Gulf of Mexico (GOM) production is still down following Laura and Tropical Storm Marco, but it has shown improvement in the last several days.
Genscape Inc. said the storms resulted in maximum daily production impacts of 1.7 Bcf/d and curtailed nearly 18.8 Bcf/d of total GOM gas production over the past two and a half weeks. However, production has rebounded significantly since Aug. 28, with receipts on Mississippi Canyon, Discovery Gas Transmission and Transcontinental Gas Pipe Line nearing, and in some cases exceeding, their pre-hurricane rates.
“That said, significant recovery potential remains for the Destin and Nautilus pipelines, each of which are down 211 MMcf/d and 175 MMcf/d relative to Aug. 18, respectively,” Genscape analyst Preston Fussee-Durham said.
With respect to Destin, Genscape had not seen “a complete recovery” from the Delta House facility, however, receipts from the Okeanos receipt point remain depressed. For Nautilus, significant recovery potential remained for Ship Shoal volumes, with the Anaconda and Manta Ray facilities well below their pre-hurricane production rates.
With GOM production making up only a small portion of total U.S. output, the lower onshore production trajectory for the remainder of the year has been supportive of prices, especially since the decline is set to occur at the same time that global gas demand is projected to gain momentum.
Some analysts expect LNG exports to likely reach capacity of about 10 Bcf/d by the winter. The only disagreement appears to be the timing at which the acceleration takes place. Some see capacity ramping up through the end of the year, while others expect a sharp uptick as soon as next month.
“We’ve gone through the worst of it,” said Wood Mackenzie’s Alex Munton, principal analyst for Americas LNG. “I think clearly in terms of customers of U.S. LNG canceling cargoes because of the economics being unviable, that situation has changed.”
Poten & Partners’ Jason Feer, global head of Business Intelligence, said some growth already has been made because of improving price spreads. For example, the Freeport LNG terminal in Texas is scheduled to load 10 cargoes in September and 17 in October, which would be close to capacity.
However, Munton and Feer note that Sabine Pass and Cameron must come back online for U.S. output to reach capacity. As of Thursday, feed gas volumes to the Gulf Coast terminals remained near zero.
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