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Natural Gas Futures Fly as Midwest Turns Cold, but Weather Models Toying With Traders
Natural gas futures exploded early Monday as weather models shifted colder with a double whammy of bitter wintry weather expected to sweep across the Lower 48 later this month. While subsequent model runs sapped quite a bit of momentum, the January Nymex gas futures contract still settled 34.2 cents higher at $6.587/MMBtu. February futures jumped 33.4 cents to $6.416.
At A Glance:
- Winter storms exit West, head east
- Storage draws seen ramping higher
- Cash rises as temperatures plunge
Spot gas prices followed suit in most regions outside of the West Coast. NGI’s Spot Gas National Avg. picked up 82.0 cents to reach $11.635.
For all the excitement the weekend weather models brought to the gas market early Monday, the European ensemble trended much warmer in the afternoon. Specifically, it trended warmer with the first of two winter storms set to hit the United States. The market took notice of the hefty drop in heating demand, sending futures tumbling.
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“It’s the same thing as past several weeks – cold at days 11-15 ultimately trend warmer as they roll into days 6-10,” said NatGasWeather’s Rhett Milne.
Given the multiple-day rally still intact, the market clearly is on edge awaiting more cold in the forecast. Futures rallied furiously early Monday, racing all the way to a $7.058 intraday high. Even with the latest changes, the Dec. 21-24 period continues to trend quite bullish with a second shot of bone-chilling Arctic air plunging deep into the Lower 48.
Criterion Research LLC’s James Bevan, director of research, said average U.S. temperatures are forecast to be near freezing in the days before Christmas. What’s more, there is potential for the chilly weather to stick around through the end of the year.
“We don’t have the full forecast for the week ending Dec. 30, but it’s setting up to be very cold next week and the following,” Bevan said on Enelyst.
The analyst noted that production has largely held not far off record highs, with maintenance activities responsible for any curtailments in recent weeks. However, “freeze-offs are very much in play for the second half of December,” particularly in Appalachia. Bevan said forecasts are pointing to temperatures below 20 degrees for the week ending Dec. 23. “The combination of a Christmas holiday and freezing conditions could present a decent drop” in production.
The frostiest forecast is expected in the Midwest, where temperatures are set to plunge nearly 20 degrees and then stall out in the teens through late December. Bevan said natural gas demand is expected to rise as temperatures decline, which can be problematic given that gas flows from the Northeast already have started to decline.
Notably, the Rockies still has a couple of weeks of extreme cold to get through, but so far, production remains near November highs, according to the analyst. Williston Basin production, meanwhile, has fallen and could slide further amid the extended cold. “It appears the early November cold affected production, and this next event will be even stronger,” Bevan said.
Down in the South Central, soon to be gone are the 85-degree temperatures that have Texans still running their air conditioners. Forecasts are showing average temperatures dipping into the 30s next week, with loads in the Electric Reliability Council of Texas (ERCOT) rising above 50 GW early in the period.
Not to worry, though. ERCOT said late last month in its Seasonal Assessment of Resource Adequacy (SARA) report that 87.3 GW of resources are expected to be on-hand from December through February.
Meanwhile, wind is expected to be volatile, starting this week off strong above 20 GW and then plummeting to around 6 GW in a few days before rebounding over the coming weekend.
Bigger Storage Draws Coming
Against that backdrop, storage withdrawals should ramp up in the coming weeks. The mild weather during the first half of December is likely to swing inventories back to a modest surplus over historical levels before more robust pulls begin.
On Monday, early estimates ranged widely from 22 Bcf to 70 Bcf for the week ending Dec. 9, though consensus appeared to be building for a withdrawal around 40 Bcf range. NGI modeled a 41 Bcf pull.
This would compare with last year’s 83 Bcf withdrawal and the 93 Bcf five-year average.
Last week, the Energy Information Administration said stocks for the week ending Dec. 2 fell by only 21 Bcf. This shrunk the deficit to the five-year average to 58 Bcf.
EBW Analytics Group LLC noted that while the upcoming cold snap may add 24 Bcf/d of demand in two weeks, the nearly 1.4 Tcf that is projected for end-of-winter inventories may provide a buffer unless significant cold persists through the winter. That said, many traders are reluctant to short the market ahead of an extreme event, and further upside to prices may be possible in the near term.
EBW also pointed out that an increase in speculator net short positioning last week has exposed the market to bullish shifts. Outstanding short positions are at the highest level since late October, according to the firm, prompting a short squeeze and steep upward pressure on Nymex futures.
“This is a key force propelling the $1.72 rebound from Tuesday’s intraday low” to Monday’s intraday high at $7.058, EBW senior energy analyst Eli Rubin said. However, “downward pressure for gas is probable after the market can see through to the end of the coming cold.”
West Cash Crumbles
With the blizzard conditions that hit the West Coast over the weekend shifting east, spot gas prices tumbled throughout California, the Desert Southwest and into the Rockies. The losses were significant and occurred despite widespread price increases elsewhere across the country. That said, prices in the region still commanded a solid premium over other U.S. markets.
PG&E Citygate next-day gas prices tumbled $8.00 from Friday to average $38.590 for Tuesday’s gas day, and Malin dropped $5.915 to $38.280.
Spot gas held above $40 throughout Arizona/Nevada, while over in the Rockies, Opal dropped $4.970 from Friday to average $39.990.
Notably, prices throughout the Midwest and Midcontinent averaged below $6.00 on Monday despite the brutal storm conditions heading toward the region.
Chicago Citygate spot gas prices shot up 80.0 cents to $5.720. Ventura picked up 70.0 cents to average $5.605.
Interestingly, prices were actually stronger in Louisiana, where Henry Hub rose $1.720 to $6.715.
AccuWeather said the coming storm would be able to easily pull in cold air, sending temperatures falling well below freezing. By Tuesday, heavy snow should get underway as temperatures hover in the upper 20s to lower 30s.
Late Tuesday through Wednesday morning is likely to bring the worst of the storm, according to AccuWeather. Snowfall rates as high as several inches per hour are expected in the most impacted spots. Strong winds and blizzard conditions also are likely in some areas.
Snow is forecast to continue spreading eastward as the storm strengthens into Wednesday, according to AccuWeather. Snow totals would vary depending on location, however many spots are set to receive over a foot of snow, perhaps closer to 2 feet in the hardest-hit places. Forecasters also are growing increasingly concerned that a wide area can encounter icing concerns early this week.
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