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Natural Gas Forward Discounts Widespread as February Expected to Bring More Warmth
Value continued to erode in regional natural gas forwards markets during the Jan. 26-Feb. 1 trading period as forecasts showed this month was poised to carry over the same warm-dominated themes that have collapsed prices winter-to-date.
March fixed prices at benchmark Henry Hub sank 44.7 cents to end the period at $2.473/MMBtu, and regional hubs throughout the Lower 48 followed suit by posting fixed price discounts ranging from around 20.0-90.0 cents, NGI’s Forward Look data show.
A notable outlier was in the Pacific Northwest, where March fixed prices at Northwest Sumas climbed 67.1 cents week/week to $4.490.
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Electronic bulletin board notices indicated congestion upstream on the Westcoast Energy Inc. system in British Columbia during the period, including an “unplanned pipeline isolation” in the T-South segment and warnings by the operator of potentially “unhealthy” levels of linepack.
Recent forecasts from Maxar’s Weather Desk, meanwhile, showed below normal temperatures covering western portions of the country during the 11- to 15-day time frame in an otherwise mild pattern for the Lower 48 as a whole.
Other Western U.S. demand hubs, despite declining overall, saw stronger basis differentials for the period. Opal March basis increased to plus-90.3 cents, a 20.3-cent gain week/week. Malin basis similarly gained 25.2 cents to end at plus-$1.157. PG&E Citygate March basis added 11.4 cents to reach plus-$2.719.
Storage Cushion Poised To Grow
Nymex futures remained under downward pressure during the Jan. 26-Feb. 1 trading period as forecasts suggested wintry conditions early in the month of February would prove fleeting.
Still, analysts identified supportive factors at play, including production declines, price-induced power demand and signs of progress toward a restart at the idled Freeport LNG terminal.
The March Nymex contract on Thursday eased 1.2 cents lower to settle at $2.456.
“While the initial precipitous losses to open the new year were the result of a structural transition from winter risk premiums to an oversupplied 2023 outlook, recent declines are more weather-dependent,” EBW Analytics Group analyst Eli Rubin said in a note to clients Thursday. “If weather turns colder in early March, Freeport LNG finally returns to service and low gas prices stimulate coal-to-gas switching, the steep bearish run for natural gas could stabilize in the 30 to 45 day period.”
The year-on-five-year-average storage surplus swelled to 163 Bcf, or plus-6.7%, as of Jan. 27 following another lighter-than-average withdrawal in the latest Energy Information Administration storage report Thursday.
The prospect of a growing storage cushion on generally mild temperatures was allowing markets to look past near-term weather-related disruptions, according to Rubin.
“Icy storms are creating havoc with more than 400,000 power outages across Texas and more than 5.0 Bcf/d of production losses nationally,” Rubin said. “Despite the demonstrated challenges from the cold weather — and renewed risks to grid reliability on a local, if not wholesale, level — forward-looking energy markets appear largely unperturbed.”
That lack of perturbation coincided with a pleasantly mild temperature outlook for key weather-driven demand markets by the end of the weekend, with the comfortable conditions extending into mid-February.
“There’s still strong national demand through Saturday as a frigid reinforcing cold shot sweeps across the Great Lakes and Northeast the next few days,” NatGasWeather told clients Thursday.
The freezing rain and power outages over Texas added to the near-term wintry conditions, the firm said.
“But like all instances so far this winter, a frosty U.S. pattern is only able to last five to six days before a much warmer pattern is quick to follow,” NatGasWeather said. The latest forecasts showed an “exceptionally warm and bearish pattern” on tap for the upcoming week, resulting from “strong high pressure ruling the southern and eastern halves of the U.S. with highs of 50s to lower 80s, or 10-30 degrees above normal.”
The exceptionally warm outlook into mid-February undercut the prospect of prices stabilizing on a tightening in the supply/demand balance, NatGasWeather added. The firm pointed to production declines and “natural gas gaining share of the energy stack due to plunging” prices as key drivers of the tighter balances.
Forward Strip ‘Too Rich’?
Meanwhile, looking beyond the heating season, amid indications of oversupply, the macro perspective doesn’t appear to offer much hope on the horizon for bulls.
“While the prompt has approached our initial target of $2.50-2.75, the 2023 and 2024 strip still looks too rich in our view at around $3.26 and $3.70, respectively,” analysts at Tudor, Pickering, Holt & Co. (TPH) said. “Investor conversations are picking up around the need to force prices toward shut-in economics to curb excessive inventory builds into October.”
The firm’s most recent modeling for 4.3 Tcf in storage by end-October “could present that risk. We see limited incremental supplies coming to meaningfully loosen weather-adjusted market balance ahead of the summer,” the TPH analysts said.
The strip could eventually need to drop below the $3 mark in order to “force enough rigs out of the market to push dry gas supply toward maintenance,” according to the firm. Even then, “associated gas growth continues to outpace demand in our view through 2024.”
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