Natural gas futures extended their losses for a third straight day as weather models continue to portray a pattern that is more reflective of springtime conditions than winter. After shedding more than 90 cents over the previous two sessions, the January Nymex gas futures contract plunged another 30.9 cents to settle at $4.258/MMBtu.


At A Glance:

  • Heating demand lingers
  • Production levels hold steady
  • Freeport recovery proves uneven

Spot gas prices also continued to retreat amid the mild temperatures in place across most of the United States. NGI’s Spot Gas National Avg. fell 39.5 cents to $4.070.

In a market where weather trumps everything, models continue to struggle to show any meaningful cold through the middle of the month, and possibly longer. Bespoke Weather Services said the balmy outlook is because of a stronger upper level trough from Alaska into western North America, and a positive North Atlantic Oscillation pattern on the Atlantic side. At this time of the year, this equates to “a warm weather rout.” The forecaster said some days in the next couple of weeks could get even warmer given the strength of these signals.

There are some differences among the models, according to Bespoke, as the European data is much warmer than the American ensemble. Both, however, are “easily” warmer than normal. The forecaster continues to track other signals that could lend to a chillier pattern later this month, “but for now, this remains nothing more than ‘something to watch.’”

Meanwhile, the midday Global Forecast System (GFS) trended colder with a weather system forecast to arrive in the Midwest Dec. 6-8, NatGasWeather said. The shift is enough to increase demand closer to seasonal levels, instead of “solidly below normal” like the overnight European model showed for this period.

“But even after the latest GFS added demand Dec. 6-8, it’s still quite bearish overall for the coming 15-day, enough so to flip current deficits of 58 Bcf to surpluses by mid-December,” NatGasWeather said.

Before then, though, the deficit could expand a bit more thanks to some chilly weather on the East Coast for the reference period ending Nov. 26. Ahead of the Energy Information Administration’s (EIA) weekly inventory report, scheduled to be released on Thursday, analysts were projecting a wide range of withdrawals for the period, which ended Nov. 26.

A Reuters poll of 16 analysts produced withdrawal estimates from 34 Bcf to 64 Bcf, with a median draw of 58 Bcf. A Bloomberg survey had a tighter range of estimates but also arrived at a median draw of 58 Bcf. NGI modeled a 58 Bcf pull as well.

A draw in line with expectations would compare with last year’s meager 4 Bcf withdrawal and the 31 Bcf five-year average draw.

It should be noted, however, that Thursday’s EIA report covers Thanksgiving week, which typically perpetuates modest demand and could result in a storage report that surprises to the downside and sends prices even lower.

Is Production Growth Here To Stay?

A lower-than-expected decline in storage inventories would be another hurdle for bulls who have struggled for drivers to propel prices higher. Along with the bearish weather outlook, production’s quick ramp following a summer in which output mostly languished in the low 90s Bcf/d has quickly reversed a once positive natural gas outlook.

EBW Analytics Group said Lower 48 dry gas production gained 0.11 Bcf/d month/month in September, but steep post-Ida production losses dragged Gulf of Mexico supply down 0.72 Bcf/d to pull national supply lower. Louisiana, up 0.22 Bcf/d month/month, led all states in production growth as Haynesville Shale output churned higher. Texas (+0.13 Bcf/d) and New Mexico (+0.11 Bcf/d) followed gains with rising Permian Basin associated gas production.

“While the anomalous Gulf of Mexico production decline and Appalachian weakness led to top-line supply losses, these repeatable gains in the Haynesville and associated gas remain likely to be the engine powering production higher into 2022,” EBW senior analyst Eli Rubin said. “If Louisiana, Texas and New Mexico collectively add 0.4 Bcf/d per month, Appalachia edges higher and other associated gas exhibits modest declines, annual production growth of 4.0 Bcf/d is possible.”

BofA Global Commodity Research credited the rise in production for the reduction in the winter risk premium that developed in the market this fall. BofA’s Francisco Blanch, commodity and derivatives strategist, said Henry Hub prices featured a lofty price tag for gas this winter as a result of the surprisingly inelastic supply/demand environment this summer.

However, that premium has begun to erode as Lower 48 production surged to start November, averaging 94.3 Bcf/d, up 1.5 Bcf/d versus October. This pushed prices lower in concert with the reduction of winter tail risks.

“We expect Henry Hub gas prices to average $3.45/MMBtu in 2022, 75 cents below current forwards,” Blanch said.

Strong LNG Demand Here To Stay

Liquefied natural gas (LNG) exports have largely propped up prices throughout the fall and should jump another 1.3 Bcf/d higher next year, Blanch said. However, BofA expects 2022 supply to meet the call, growing 3.5 Bcf/d year/year. In turn, the bank’s analysts expect global prices like Asia’s Japan-Korea Marker and Europe’s Title Transfer Facility (TTF) to “remain well-supported this winter and throughout 2022 in an effort to rebuild European storage levels.”

Houston-based Mobius Risk Group also noted how quickly the market has shrugged off any potential supply concerns given the peak of the winter season is still weeks away. Mobius analysts said normal weather typically would bring a steady string of increasingly weekly withdrawals. Instead, the current state has market participants pondering when the first triple-digit draw of the season could arrive.

“The domestic market is presently content to ignore cold weather in Europe, which has lifted the front of the TTF curve back squarely above $30.00/MMBtu, and instead languish at levels indicative of minimal concern for preserving supply for peak winter,” Mobius analysts said.

It is not necessary for the domestic market to remain linked to downstream markets in Asia or Europe so long as weather remains mild in North America, according to the Mobius team. However, “a flip such that the United States were the strongest demand market of the big three could narrow what is currently more than a $25.00/MMBtu spread.”

Mobius pointed out that European storage has drawn down 94 Bcf since the beginning of October, versus the same period last year when inventory increased by 10 Bcf. Considering the starting point this year was 620 Bcf lower than the same point last year, Mobius analysts said “European consumers are still facing a precarious situation if temperatures end up cooler than normal this winter.”

$3 Cash Handles

With daytime temperatures holding at comfortable levels for a few more days across the country, spot gas prices continued to crater midweek. Multiple locations posted losses of more than a quarter day/day, sending next-day prices back below $4.00.

Most of Texas sported a $3 handle for Thursday’s gas delivery, with Waha dropping 15.5 cents to $3.750 and Houston Ship Channel tumbling 29.0 cents to $3.960.

Prices across the country’s midsection posted similar declines, with the Chicago Citygate sliding 20.0 cents to $3.940 and OGT slipping 6.0 cents to $3.745.

NatGasWeather said a weather system/cold shot is forecast to push into the Midwest late this weekend into early next week. The front would bring overnight temperatures down into the 10s to 30s for a minor increase in national demand, although most of the rest of the country would continue to see highs of 50s to 70s.

The sell-off across U.S. spot markets was a bit more aggressive on the East Coast. Cove Point next-day gas plunged 45.0 cents day/day to average $4.20, and Eastern Gas South fell 31.5 cents to $3.650. Downstream, Transco Zone 6 NY tumbled 51.0 cents to $3.880.

Losses on the West Coast were limited to no more than 25.0 cents at the majority of locations.