Natural gas forwards bounced back from a late-February slump as the fallout from Russia’s attack on Ukraine exposed the far reaching consequences of the war. Armed with the potential for chilly weather to return to the Lower 48, April fixed prices rallied by an average 14.0 cents from Feb. 24-March 2, according to NGI’s Forward Look.

The prompt month’s move higher was similar to the upswing at the benchmark Henry Hub, where April forward prices jumped 12.0 cents during the period to reach $4.763/MMBtu on Wednesday. The summer strip (April-October) also climbed 12.0 cents and averaged $4.840 for the period, while the winter 2022-2023 strip picked up 9.0 cents to reach $4.960, Forward Look data showed.

Basis moves for April were less significant at the majority of U.S. locations, generally trading within a nickel of the Henry Hub. The Northeast proved to be an exception, though, with the arrival of a wintry mix late in the week expected to boost heating demand through the weekend. Temperatures were forecast to plummet and even dip below freezing in some areas.

In New England, Algonquin Citygates April basis jumped 23.0 cents from Feb. 24-March 2 to reach plus 49.4 cents, according to Forward Look. The April fixed price stood at $5.256 on Wednesday, while the summer strip climbed 26.0 cents to average $4.490. The winter 2022-2023 strip was up $2.090 to average $18.523.

Transco Zone 6 NY April basis edged up 9.0 cents during the period to reach minus 52.8 cents, with a fixed price of $4.234. Summer prices were up 22.0 cents to $3.910, while the upcoming winter jumped 64.0 cents to $7.690.

The larger basis increases also spilled over into upstream Appalachia markets, where production has struggled to fully recover from freeze-offs, and storage inventories continue to draw down amid the continued cold weather.

Texas Eastern M-3 April basis rose 11.0 cents from Feb. 24-March 2 to reach minus 53.3 cents, with a fixed price of $4.229, Forward Look showed. The summer strip rose 26.0 cents to average $3.970, and the winter 2022-2023 package tacked on 34.0 cents to reach $7.102.

Eastern Gas South April basis picked up 8.0 cents during the period to reach minus 66.9 cents, with a fixed price of $4.093. Summer climbed 27.0 cents to average $3.800, while the winter added 13.0 cents to reach $4.128.

Is Storage Deficit A Big Concern?

The heftier increases for the winter are significant given that the market is on the cusp of warmer weather.

There are a few weeks remaining in the official withdrawal season and a possibility of more cold later this month. At the same time, the spotlight on Europe’s energy crisis has been amplified given the conflict in Ukraine.

As for U.S. inventories, the deficit versus the five-year average expanded a bit with the latest round of government data. The Energy Information Administration (EIA) reported a 139 Bcf withdrawal from storage for the week ending Feb. 25, which left stocks at 1,643 Bcf. This is 216 Bcf below year-ago levels and 255 Bcf below the five-year average.

Broken down by region, the Midwest led with a steep 46 Bcf decline in inventories, according to EIA. The East withdrew 38 Bcf, and the South Central pulled out 35 Bcf. This included a 30 Bcf drop from nonsalt facilities and 5 Bcf from salts. Pacific stocks slipped 12 Bcf, while the Mountain fell 9 Bcf.

The Schork Group noted that the hefty pull from South Central stocks was about double the normal withdrawal for this time of year. This is an extension of a trend that has developed this winter, with draws coming in 61 Bcf, or nearly 12%, above normal. The result: the largest deficit since July 2019, according to the analyst firm.

Bespoke Weather Services said the EIA’s net 139 Bcf draw “does not materially alter our view” of the storage trajectory moving forward. End-of-season storage levels are expected to fall somewhere in the 1,300-1,400 Bcf range.

This, of course, depends on how the weather shakes out through the rest of March. The latest models continue to show colder temperatures returning to the Lower 48 by the middle of the month. But there is the possibility that warmer air would quickly follow.

An analysis by EBW Analytics Group found that all of the recent storage tightening could be attributed to frigid January and February weather. Furthermore, structural, weather-normalized fundamentals may be looser than the market recognizes.

There is no immediate fundamental forcing mechanism to pressure prices lower — and the storage trajectory remained 300 Bcf below the five-year average in early March, EBW noted. And yet, “the flattening and modest narrowing of the storage deficit may still yield modest bearish fundamental pressure on the April contract.”

The Schork analyst team said it’s “an obvious smart bet” that end-of-season storage would not come in at or above 1.535 Tcf. It noted that early consensus for the next EIA report is “a significant delivery” of around 120 Bcf.

“At the current rate, storage is now on pace to finish winter below 1.35 Tcf, 23% below last year’s ending balance,” Schork analysts said.

Choppy Trading Likely To Persist

The continually steep stock withdrawals combined with the bullish sentiment from the war in Ukraine pave a rocky road ahead for Nymex gas.

Notwithstanding the lack of a strong, direct fundamental connection between the evolving conflict in Ukraine and U.S. natural gas, Henry Hub futures appeared to be the beneficiary of the external influences, according to EBW. Indirect fundamental linkages between soaring global energy prices and US natural gas, meanwhile, point in opposite directions, it said.

The more immediate connection is bearish, according to EBW senior analyst Eli Rubin. Soaring oil prices may stimulate incremental U.S. crude production, carrying increasing supplies of associated gas. More indirectly, and less widely recognized, is the potential impact of soaring global gas prices on bullish tail risks for winter 2022-23.

“In a scenario with a low natural gas storage trajectory (probable) and an extreme cold winter (less likely), there is a bullish tail risk that Nymex futures may need to rise to global levels to avert domestic shortages,” Rubin said.

If there is a 2-4% bullish tail risk of extreme upside, spiking European Title Transfer Facility (TTF) prices, which briefly surged above $68 on Friday, may more directly impact the clearing price of natural gas, according to the analyst.

This week’s escalation in TTF pricing that bled into U.S. markets is a perfect example of how the conflict may influence domestic pricing, especially as there is little ability to further ramp up liquefied natural gas (LNG) exports to Europe. On Friday, the April Nymex gas futures contract settled at $5.016, up an impressive 29.4 cents on the day.

“Eventually, large macro funds will reposition themselves as the world adjusts to the new reality of a ground war in Europe, allowing natural gas fundamentals to come to the forefront,” Rubin said.

Looking further down the road, a focus on production growth will be closely watched, with recent EIA data reflecting a slower realized growth rate in December. This may indicate downside risk to the EBW’s “ambitious” 4.25 Bcf/d December 2021-December 2022 production growth projections. After adjusting for post-Ida Gulf of Mexico supply rebound and seasonal Appalachian growth, 4Q2021 output gained at only a 3.2 Bcf/d annualized pace, it said.

The firm anticipates increasing growth rates out of Texas, New Mexico and Louisiana, as well as modest growth (reversing declines) across the Bakken and Niobrara shales and in Oklahoma, “helping to pick up the pace,” according to Rubin. “Tremendous” seasonal gains for Appalachian output also remain likely in 4Q2022.

“In spring and early summer, however, while output may pick up – and could potentially still exceed market expectations, medium-term growth may not be sufficient to assuage low storage trajectory fears, fueling strong buying of the 2022 injection season strip,” he said.