Natural gas futures gave up ground on Friday as traders took profits following a frenzied rally that saw the prompt month surge more than 46 cents over the two prior trading sessions. The catalysts for the spikes remained firmly in place: Light production in Hurricane Ida’s wake and festering concerns about inadequate storage ahead of winter.

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At A Glance:

  • Futures lose ground to end week
  • GOM production concerns linger
  • Spot prices moderate in the West

The October Nymex contract fell 9.3 cents day/day and settled at $4.938/MMBtu. November lost 9.9 cents to $4.973.

Spot gas prices dipped lower as well. NGI’s Spot Gas National Avg. shed 5.5 cents to $4.860.

After crashing ashore in Louisiana Aug. 29 as a Category 4 hurricane, Ida left in its path severe wind and flooding damage that curbed production in the Gulf of Mexico (GOM) in the days since.

As of Friday, nearly three-quarters of the natural gas produced in the GOM, 1.68 Bcf/d, remained offline, according to the Bureau of Safety and Environmental Enforcement (BSEE). 

Based on data as of midday on Friday, 65 oil and gas production platforms still were unmanned, which was more than 11%, BSEE said. Personnel also had not been returned to three moored rigs, or 28% working in the offshore. In addition, two unmoored rigs, or 13%, remained off location from where they were positioned before the hurricane.

[Survey Says: NGI editor Christopher Lenton and energy expert and columnist Eduardo Prud’homme dive into the results of NGI’s fifth survey of the Mexican natural gas market. What are active buyers and sellers telling us about what the industry needs? Tune in to NGI’s Hub & Flow podcast to find out.]

Output was already modest ahead of Ida, with production averaging about 92 Bcf/d over the summer months – below the levels prior to the coronavirus pandemic and roughly 1 Bcf/d below what many analysts have said is needed to align supply with demand before winter.

NatGasWeather noted Friday that “a new tropical disturbance will attempt to strengthen” in the far western GOM and then track toward the South Texas/Mexico border by Tuesday, “with heavy showers.” The system could force further delays in GOM production, the firm said.

On the other side of the equation, domestic demand proved strong throughout the summer months amid stifling heat over much of the Lower 48. At the same time, utilities in Europe and Asia clamored for U.S. exports of liquefied natural gas (LNG) because of supply constraints on both continents.

LNG exports continue to soak up excess supply and feed imbalance worries. LNG feed gas volumes topped 11 Bcf on Friday – within striking distance of record levels.

“The major European indices hit post-2008 and then all-time highs multiple times throughout the summer — even surpassing Asian prices on a handful of days,” said RBN Energy LLC analyst Lindsay Schneider. “At the same time, Asian prices have set all-time seasonal records and are now sitting just below the previous single-day high settle from this past January. Usually, as the weather cools heading into fall, so do prices, but that’s unlikely this year as the European gas storage inventory is at the lowest level for this time of year than we’ve seen in recent history, and the time to replenish stocks for the winter is rapidly running out.”

With output failing to stay astride because of lingering pandemic apprehension among U.S. producers, worries are mounting that underground stockpiles of gas needed to fuel heating needs during the winter season may fall short. This has placed upward pressure on prices.

Despite Friday’s dip, natural gas futures advanced for a third consecutive week. The prompt month closed up 5% from the prior week’s finish. Futures had gained 8% the previous week.

Analysts at both Goldman Sachs and Morgan Stanley said in recent reports that, should the winter prove colder than average, Henry Hub prices could soar to $10.000.

The firms pointed to precariously low inventory levels relative to last year and historic averages.

The U.S. Energy Information Administration (EIA) on Thursday reported an injection of 52 Bcf natural gas into storage for the week ended Sept. 3. It more than doubled the previous week’s increase and exceeded analysts’ expectations for a build around 40 Bcf. But it did little to address the storage deficit.

The build lifted inventories to 2,923 Bcf, but that was well below the year-earlier level of 3,515 Bcf and the five-year average of 3,158 Bcf.

Wood Mackenzie analyst Eric Fell estimated that, compared to degree days and normal seasonality, the latest injection was close to neutral — tight by only 0.2 Bcf/d versus the five-year average.

Despite eclipsing expectations, the print showed continued supply deficiency, analysts at Tudor, Pickering, Holt & Co. (TPH) noted.

The tightness results from a “combination of weak supply, owing primarily to extended Gulf of Mexico outages, and continued robust power generation demand as we’ve shifted into shoulder season,” the TPH analysts said. They noted “extended warm weather forecasts through much of September” could add further upward pressure on prices in the weeks ahead.

Cash Cascades

Spot gas prices soured on Friday, led lower by hubs in the West that gave back some of the outsized advances they made earlier in the week.

SoCal Citygate shed $2.555 day/day to average $7.335 and El Paso S. Mainline/N. Baja fell $4.915 to $7.970.

Elsewhere, prices were mixed. In the Midwest, Chicago Citygate picked up 5.5 cents to $4.820, while in Texas, Waha fell 3.0 cents to $4.675. Further East, Columbia Gas gained 8.5 cents to $4.300.

NatGasWeather said highs of upper 80s to 100s permeated the West and southern Plains on Friday because of strong high pressure, fueling demand. Still, prices pulled back from unsustainable levels reached in recent trading days. At one point in intraday trading during the week, prices peaked at $27.000 in California.

Meanwhile, the Great Lakes and East were comfortable with highs of 70s and 80s on Friday. Much of the Lower 48, however, was expected to warm above normal over the weekend and into the week ahead as the high pressure strengthens and generates highs of 70s-80s across the northern United States and 80s-90s throughout the southern half of the country. 

By the end of the week, national demand could ease some, NatGasWeather said, as comfortable temperatures settle in over the Midwest and Northeast. Overall, forecasts point to above-average temperatures and solid cooling demand through September and potentially into October, it said.

In addition to excessive heat, an energy storage facility in Moss Landing, CA, was forced offline for the past week after it overheated and damaged batteries. Hubs in the West also are struggling to meet demand following the rupture of a segment of the El Paso Natural Gas Pipeline (EPNG). The Line 2000 segment near Coolidge, AZ, exploded on Aug. 15. The blast has forced EPNG to restrict Permian flows west into Southwest markets.

What’s more, as Wood Mackenzie analyst Colette Breshears noted, more than 60 wildfires hve raged across the western United States, spanning California, Oregon and Washington, as well as the Mountain West. The blazes can aggravate already intense heat challenges.

“September is expected to continue to pose additional fire risks,” Breshears said. “In recent years, fire seasons have become far longer, beginning earlier and ending later into October and sometimes November. Drought conditions continue to supply dry fuel, which helps fires spark.”