A new production high, weak Henry Hub cash and a warmer shift in weather outlooks swept the rug out from under natural gas futures on Monday. After plunging as much as 10.7 cents lower day/day, the November Nymex gas futures contract settled at $2.238, down 8.2 cents. December fell 7.6 cents to $2.441.
Cash prices were lower at benchmark Henry Hub and across much of Texas as mostly mild weather was on tap for another day before a cold front sweeps through the country on Wednesday. However, solid increases on both coasts boosted the NGI Spot Gas National Avg. up 19.5 cents to $1.910.
After notching gains on four days last week, the November Nymex gas futures contract opened Monday’s session down a few cents as key weather models trended warmer, shedding demand from their outlooks. There is still some cold in the forecast, but it’s not as strong and is focused more in the central/western states as opposed to the more important population centers in the eastern United States, according to Bespoke Weather Services.
“The upcoming week sees below-normal demand thanks to eastern warmth, with demand climbing to normal this weekend into early next week, then finally reaching above normal levels in the middle of next week, if current forecasts hold,” Bespoke chief meteorologist Brian Lovern said.
Bespoke is watching the tropical forcing patterns, which suggest that milder weather could return in the wake of whatever cold there is during the first week of November, “assuming blocking is not strong enough to outduel the signal.”
The midday run of the Global Forecast System (GFS) gained back most of the demand it had lost in the overnight run, but unless the European model were to trend colder, it might not matter what the GFS shows unless production were to ease lower, according to NatGasWeather. The firm noted that natural gas production hit an all-time high of 95 Bcf/d over the weekend, a figure also touted by Bespoke.
That production high was likely the culprit in sending futures down to an intraday low of $2.213 before a modest rebound before the close.
However, Genscape Inc. puts production at a slightly lower figure, albeit one that still sets a fresh high. The firm estimates that production crested the 93 Bcf/d mark for the first time on Friday, when it reached 93.58 Bcf/d. Weekend production was estimated to have averaged 93.37 Bcf/d.
“Production the past three days has been averaging nearly 1.58 Bcf/d greater than the month-to-date average,” Genscape senior natural gas analyst Rick Margolin said. “Virtually every producing area in our estimate is up except the San Juan and West.”
The gains are led by Texas, where production has been averaging nearly 0.53 Bcf/d above the month-to-date average. East output is up 0.5 Bcf/d; Permian is up 0.35 Bcf/d; and volumes out of the Gulf Coast and Rockies (excluding Bakken) areas are both running 0.18 Bcf/d higher than month-to-date averages, according to Genscape.
With sustained cold looking like it’ll take a bit longer to arrive, and production expected to continue growing, prices could see more downside in the coming weeks. EBW Analytics continues to track speculator positioning, with the latest Commodities Futures Trading Commission data showing a 31,000 contract increase in net short positioning for the week ending Oct. 15. Of the increasing speculator net short position, 82% came from increasing short positions and 18% came from declining long positions.
“The willingness of speculators to aggressively short natural gas even as the beginning of winter approaches remains a stalwart sign of bearish market sentiment, and may continue to make it difficult for natural gas futures to rally strongly near term,” EBW said. “Still, the swelling number of short positions — while still shy of late-summer highs — presents an increasing risk of a bullish catalyst triggering a massive short-covering event and sending natural gas sharply higher.”
Strong demand on both coasts boosted spot gas prices in key regions on Monday. However, it was truly a tale of two cities, as it was lingering summer heat that drove cash prices in California, while chilly air was set to make its way into the Northeast, driving up prices in that region.
Solid gains of 30-40 cents were seen throughout the Rockies, while 20-cent-plus increases were the norm in the Midwest and Midcontinent.
The substantial hikes in the Rockies occurred as Northwest Pipeline (NWPL) was set to kick off maintenance on Tuesday that would disrupt about 200 MMcf/d of northbound flows out of the San Juan Basin through Saturday. Reroute capacity exists to allow this gas to move southwest on El Paso Natural Gas (EPNG) or Transwestern Pipeline, or northbound on Transcolorado Pipeline, according to Genscape.
Redirecting the flows onto EPNG’s North Mainline could trigger some competition with Permian Basin supplies as the downstream destinations for this gas (Phoenix demand, exports to California) are largely flowing full. An alternative to rerouting onto EPNG would be to flow out of the basin on Transwestern or Transcolorado.
“Both pipes have some degree of capacity available to increase flows out of this area based on recent flow levels and posted operating capacities,” Genscape analyst Joseph Bernardi said.
As for Permian pricing, widespread decreases reflected the overall softness in the Texas market, even though losses in the western part of the state were far more substantial than those in East Texas. Waha next-day gas tumbled 22.0 cents to average 48.0 cents, although traders were seen as low as a quarter.
The quick return to a cheap price environment in the Permian is not surprising given that Gulf Coast Express (GCX) is already running full and demand is seasonally low. With Kinder Morgan Inc. executives recently pushing back the expected in-service of their second Permian conduit to early 2021, rather than fall 2020, analysts see more price pains ahead.
Goldman Sachs expects Permian natural gas production to increase by 2 Bcf/d from this summer’s levels by the end of 2Q2020, ultimately matching the added take-away capacity recently brought on by GCX. If realized, this would imply that the region would find itself once again bottlenecked next summer until the next gas outlet, Kinder’s Permian Highway pipeline (PHP), became operational.
“With PHP now delayed into 2021, we expect the extended bottleneck to keep Waha gas prices under pressure for longer, with relief dependent on seasonal support to demand and exports to Mexico,” Goldman Sachs analysts said. “That said, this weakness in Waha could admittedly be offset (or delayed) by slower oil production growth.”
Elsewhere in Texas, Carthage next-day gas jumped 17.5 cents to $1.855.
Henry Hub cash fell 10.0 cents to $2.040, while other markets in Louisiana saw a mix of gains and smaller losses.
There have been no noticeable impact from Tropical Storm Nestor as it hit the Eastern Seaboard over the weekend, according to Genscape. Nestor did not reach the Gulf and production was not impacted, holding at 2.58 Bcf/d after averaging 2.52 Bcf/d month to date, according to Genscape.
“Florida took the brunt of Nestor’s high winds, rain and storm surge on Saturday, Oct. 19, but state aggregate demand was at 4.17 Bcf/d for that day, 70 MMcf/d higher day/day,” Genscape analyst Josh Garcia said.
It is possible this was the last major storm of this year’s hurricane season, which typically winds down in October. Late Monday, there was no tropical cyclone activity expected within the next 48 hours, according to the National Hurricane Center.
Southeast prices rose anywhere from about a nickel to more than 20 cents, while Appalachian prices jumped upward of 20 cents at most hubs.
The runup in cash precedes a strong weather system and associated cold shot that is pushing out of the West and into the Midwest and Plains. While this system is expected to bring rain and snow, more importantly, it is expected to drop overnight temperatures behind the front into the 20s and 30s for stronger demand, according to NatGasWeather.
“This system is forecast to push into the Northeast on Wednesday, although it is not expected to be quite as cold by the time it arrives.”
Meanwhile, Tennessee Gas Pipeline (TGP) will begin three simultaneous maintenance events along their system on Tuesday.
The first of these is a maintenance pig which will limit operational capacity at Station 32 in Jasper County, TX, to 534 MMcf/d. Average flows at this point have clocked in at 762 MMcf/d over the past 30 days, therefore restricting 228 MMcf/d of gas for this one-day event, according to Genscape.
A single-day emergency shut down (ESD) test will occur at Station 313 in Potter County, PA, which transmits gas northward to join TGP’s 200 line.
“Although nominations indicate that gas has flowed past the operational capacity of the station, restrictions to operational capacity have reduced average throughput,” Genscape analyst Dominic Eggerman said.
Flows over the past 30 days have averaged 719 MMcf/d, and with operational capacity being reduced to 388 MMcf/d, these average flows should fall by 331 MMcf/d, according to Genscape.
Another ESD test at Station 548 in Kemper County, MS, will limit northbound flows from Tuesday to Thursday to 1.15 Bcf/d, restricting about 190 MMcf/d of gas.
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