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Natural Gas Futures Rally on Returning LNG Demand, Production Revisions
Natural gas futures roared back midweek as export demand rose sharply following maintenance and production dipped lower for the second straight day. The July Nymex gas futures contract surged 7.5 cents day/day to $3.333. The August contract picked up 7.5 cents to $3.352.
At A Glance:
- EIA posts 58 Bcf withdrawal
- Late March looking cold
- Production stays strong
Spot gas increases also became more widespread ahead of warmer weather on the East Coast. However, big losses in California left NGI’s Spot Gas National Avg. unchanged at $3.095.
There continued to be small changes to the long-range weather outlook on Wednesday. However, the pattern was still expected to result in relatively light demand east of the Plains for the next few days, according to NatGasWeather.
Still, the overall U.S. pattern is set to become hotter for the five- to 15-day forecast and is likely viewed as having a “bullish lean” for Saturday (June 26) through July 5. National cooling degree days are forecast to be above normal.
“Sure, the pattern could be more intimidating, but there’s still enough coverage of highs reaching the upper 80s to 100s to result in smaller-than-normal weekly builds the last week of June and the first week of July,” NatGasWeather said. “And the upper pattern does favor widespread above-normal temperatures holding into the second week of July to keep strong national demand going for the 15- to 20-day period.”
With weather demand set to lag another few days, Wednesday’s recovery in feed gas consumption serving U.S. liquefied natural gas (LNG) facilities fueled momentum for prices early in the session.
The July Nymex contract opened at $3.257, nearly flat to Tuesday’s close, and then jumped to an intraday high of $3.383. The steep climb occurred as feed gas deliveries to Lower 48 LNG export terminals shot back above 11 Bcf, with Sabine Pass maintenance appearing to have ended. Robust global demand also indicated little to no slowdown — and potentially moderate growth ahead — for domestic exports in the second half of the year.
EBW Analytics Group pointed out that European gas storage is currently at its lowest seasonal level ever. Title Transfer Facility prices are at a 13-year seasonal high.
Prices later this year are to depend heavily on Gazprom’s ability to complete construction by this fall of the Nord Stream 2 pipeline, according to EBW. The results of the German election in September also may influence pricing.
“If Germany’s Green Party, which opposes the pipeline, plays a major role in forming a new government, permits required to start up the pipeline might be delayed or denied, potentially creating extremely tight gas market conditions this coming winter,” EBW said.
Meanwhile, the analyst team at Tudor, Pickering, Holt & Co. (TPH) was keeping a close eye on power generation. Heading into the summer, the analysts expect demand destruction to play an important role in balancing the market as prices rallied.
“We’d been focused on whether our modeled gas-to-coal switching relationship would hold and drive less power burn from gas,” the TPH said.
TPH had previously forecast around 1.3 Bcf/d less power burn through September on modeled sensitivity of a 25-cent increase in price, resulting in 1 Bcf/d of less demand. Through the start of summer, though, there’s been less elasticity than the modeling suggests.
“During 2Q2021, power generation has averaged 62.3% (around 28.2 Bcf/d) of thermal power generation versus our modeled 61.8% (roughly 27.5 Bcf/d,” said the TPH analysts. “This past week, however, gas’ share of thermal generation averaged 61.0% (roughly 35.1 Bcf/d), more in line with what we’d expect given the rise in pricing.”
Should last week’s result be an aberration and prior trends continue, the TPH analysts said there could be further upside to their modeled power demand heading into the third quarter. This would provide “solid support” for pricing.
“Storage currently sits at a 6% deficit to the five-year average, with our latest modeling suggesting peak storage at 3.4 Tcf versus the five-year average at 3.7 Tcf,” TPH said. “Beyond injection season, our modeled undersupply is seen persisting into 2022 and driving upside to strip pricing towards the $3.25/MMBtu level, versus the current curve at $2.93/MMBtu.”
As for Thursday’s government inventory report, Reuters polled 17 analysts, whose estimates ranged from a build of 56 Bcf to 79 Bcf, with a median injection of 68 Bcf. NGI also modeled a 68 Bcf build. A Bloomberg survey of 10 analysts produced a tighter range of estimates, with a median injection of 64 Bcf.
The Energy Information Administration (EIA) is scheduled to release its weekly storage report at 10:30 a.m. ET Thursday. Last year, EIA recorded a 115 Bcf injection, and the five-year average injection stands at 83 Bcf.
“It’s a tricky build to predict due to record setting heat over the West into the Plains but rather comfortable across the Great Lakes and Northeast,” said NatGasWeather. “We currently expect low to mid-60s Bcf.”
The firm added that the latest midday Global Forecast System model maintained the hot pattern expected for Saturday through July 5. With core summer heat about to arrive, and with the weather pattern looking “hot enough” for the first half of July, buying has intensified.
“What could also be influencing recent trade is the coming expiration of July 2021 options and futures Friday and Monday,” NatGasWeather said. “With $3.30 having been quickly reclaimed on July/August, bulls are back in control and look to take out highs of the year that are just a few cents higher.”
Spot gas prices continued to gain ground Wednesday with hotter weather returning to the Gulf Coast following a series of thunderstorms. The most significant heat, however, was seen heading toward the Pacific Northwest, fueling gains across the region.
AccuWeather said “record heat” had already begun building in some areas, with conditions set to become even hotter in the coming days. “We’re going to be looking at all-time record highs in some spots,” AccuWeather chief broadcast meteorologist Bernie Rayno said.
The forecaster indicated that some of the places that could see temperatures soar farthest above normal include those along the Interstate-5 corridor between Seattle and Portland, OR.
It is not only the Pacific Northwest where all-time record highs may be set, according to AccuWeather. There is the potential for Canada to set a new high temperature mark with a heatwave this weekend to early next week. The current record of 113 degrees was set on July 5, 1937, in Midale and Yellow Grass, Saskatchewan.
“Kamloops, Kelowna and Lillooet, British Columbia, all have a shot at reaching or slightly exceeding the all-time Canada high temperature mark,” AccuWeather senior meteorologist Brett Anderson said.
As for prices, KRGT Rec Pool next-day gas shot up 22.0 cents to average $3.445, and Malin rocketed up 25.0 cents to $3.525.
In Western Canada, Westcoast Station 2 spot gas tacked on only 6.0 cents to average $3.140.
Along the Gulf Coast, Henry Hub climbed 11.0 cents to $3.330, and in the Southeast, Transco Zone 5 picked up 4.5 cents to $3.375.
Prices farther east also gained momentum ahead of returning heat in that region. Algonquin Citygate spot gas added 8.0 cents to $2.620.
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