Natural gas futures slipped early Monday as production returned to near all-time highs and weather models cooled a bit for late August. Though bulls stepped in to buy off session lows, the September Nymex gas futures contract settled at $8.728/MMBtu, off 4.0 cents from Friday’s close. October futures fell 3.2 cents to $8.712.

southeast basis curves

At A Glance:

  • Robust supplies loom large
  • Cold weather shift lies ahead
  • Freeport LNG lingering wildcard

Spot gas prices were mostly lower after the weekend, but California recorded stout gains on scorching, triple-digit temperatures. NGI’s Spot Gas National Avg. ultimately shed 1.0 cents to $8.350.

Cooler weather is set to continue into the latter part of August, with models backing off the amount of projected demand for the next 15 days. “Impressive” heat is expected to continue over the West and southern Plains this week, but the opportunity for extreme heat in the eight- to 15-day period should be focused over the West, according to NatGasWeather.

The rest of the country is forecast to be “very warm to comfortable,” including in parts of Texas, the South and the Southeast, the forecaster said. High temperatures would likely tap out in the mid-80s to mid-90s, which is “much more tolerable than oppressive heat of the past few months.

“Essentially, the opportunity for widespread extreme heat east of the Plains will drop considerably after this week, according to NatGasWeather.

Even with weather conditions starting to moderate, power burns remained strong. Wind generation dropped sharply last week, with market observers expecting the heightened pull on gas-fired generation to lead to a lower-than-normal injection into storage in the next government inventory report. Early estimates were wide ranging, from the mid-20s Bcf to 40 Bcf. This compares with the 45 Bcf five-year average.

Inventories as of Aug. 5 stood at 2,501 Bcf, which is 268 Bcf below year-earlier levels and 338 Bcf below the five-year average, according to the Energy Information Administration.

EBW Analytics Group said by the end of September, the market may increasingly shift focus from a lackluster end-of-October storage target – currently south of 3.4 Tcf – to the upcoming winter heating season ahead.

EBW’s most likely storage trajectory suggested barely 1,000 Bcf in storage to exit March. This is more bullish than market consensus and suggests substantial upside price risks if any bullish catalysts materialize this fall, according to the firm. Over the next several weeks, however, several bearish developments remain possible. 

Hurricanes have transformed the market outlook in each of the past two years, EBW said. For now, though, there is no tropical cyclone activity expected through at least midweek.

Production also could spike higher, with output early Monday nearing all-time highs near 98 Bcf, according to Bloomberg.

Meanwhile, autumn weather is trending warmer and Freeport LNG’s return could face delays.

These factors could help drive prices lower ahead of winter’s arrival, EBW said. “If bearish catalysts fail to transpire, however, the balance of price risks remains to the upside heading into the early heating season.”

Longer term, the U.S. gas market is likely to remain tight in the absence of supply growth. Domestic dry natural gas production is set to average 97.1 Bcf/d this month and 96.6 Bcf/d for 2022, which would represent a 3% year/year increase. Production is forecast to then rise to an average of 100.0 Bcf/d in 2023, according to EIA.

Liquefied natural gas exports also are rising, according to EIA. 

Exports are forecast to average 10.0 Bcf/d for the third quarter and 11.2 Bcf/d for the full year, a 14% increase over year-earlier levels. The latest projections reflect Freeport “resuming operations sooner than we had initially expected,” researchers said. EIA is forecasting U.S. LNG exports to average 12.7 Bcf/d in 2023.

Cowen Equity Research said robust LNG demand is expected to continue next year given normalizing demand in China and Europe having more LNG import capacity to offset lost Russian supply. The Cowen team, led by analyst Jason Gabelman, estimated demand to increase around 40 million metric tons per year (mmty) in 2022 and 65 mmty in 2023. Thereafter, annual demand growth should normalize at about 20 mmt.

“The combination of strong near-term demand growth and supply inflecting in 2025 implies balances will remain tight and gas prices high until 2025 – and balance from 2025 to 2028,” the Cowen team said.

Surging California Cash

Spot gas prices were mostly weaker on Monday as heavy rains were expected to drench large swaths of the country.

California proved the exception, though, as temperatures were forecast to climb above the century mark. The National Weather Service (NWS) said upper-level ridging would build into the Great Basin, allowing temperatures to rise into the mid-to-upper hundreds over parts of California. That prompted an “excessive heat watch” over the Sacramento and San Joaquin Valleys Tuesday and parts of the Pacific Northwest on Wednesday.

SoCal Citygate prices skyrocketed ahead of the hotter weather, with next-day gas surging $1.610 from Friday to average $12.455 for Tuesday’s gas day. Malin picked up 15.0 cents to average $8.725.

Cash prices also were elevated in the Desert Southwest. KRGT Del Pool jumped $1.110 to average $11.050.

Most other U.S. locations softened from Friday’s levels amid several weather systems sweeping across the country. NWS forecasters said a weak front over the Ohio Valley would move southeastward into South Carolina and Georgia by Wednesday. The system is likely to produce strong thunderstorms, with heavy rain also expected in Florida.

On the weather forecasts, Florida Gas Zone 3 spot gas prices tumbled 27.0 cents to $8.840, while Transco Zone 3 fell 16.5 cents to $8.865. Henry Hub was down 20.0 cents to $8.550.

Most locations in the Midcontinent and Midwest plunged between 15.0 and 30.0 cents, but Southern Star was down 36.0 cents to $7.870. West Texas points jumped as much as 52.0 cents from Friday, with Transwestern averaging $8.095 for Tuesday’s gas day.