Natural gas futures soared to a nearly two-year high for the second time this week, but the price spike had little to do with supply or demand. Instead, analysts said options trading and massive speculative positioning ahead of the November Nymex contract’s upcoming expiration factored into Tuesday’s price behavior. The prompt month went on to settle only a half-cent lower at $3.019. December climbed 5.8 cents to $3.311.

Markets

Spot gas prices were a mix of losers and gainers, including in the Permian Basin, where next-day gas soared above $3.00 as freezing weather took a toll on power and gas infrastructure. NGI’s Spot Gas National Avg. fell 5.0 cents to $2.940.

With expiration looming on Wednesday, futures struggled to move decisively in either direction at the start of Tuesday’s session. Prices opened slightly lower day/day at $3.016, dropped to a $2.986 intraday low and then rebounded to a $3.091 high.

“It is rare for a market to print a multi-year high the previous day, slide below a big whole number the next day, and then gather itself up and reverse higher,” said Mizuho Securities USA’s Robert Yawger, director of Energy Futures. “You have to wonder, who are the traders who buy these dips and continue to push higher?”

Yawger said Tuesday’s rally obviously was a “spec run phenomenon,” with Commodities Futures Trading Commission (CFTC) data indicating the combined IntercontinentalExchange/Nymex Henry Hub position is net long more than 500,000 contracts. To put it into context, “civilized contracts” such as gold sport a CFTC net long speculative position of 135,000 contacts, Yawger said. Crude oil was net long 332,000 contracts.

After gas posted a 25-year low of $1.432 on June 26, it didn’t take long for speculative traders to notice and start jumping in, according to Yawger. Gas then traded to a nine-month wave high of $2.473 on Aug. 28, a gain of 70.2% top to bottom, in two months and two days. Once these traders “pulled the plug” in the face of the massive storage overhang, prices pulled back to a wave low of $1.795 on Sept. 21. This triggered the latest running of the bulls. 

The “canary in the coal mine” is the March/April spread, according to Yawger. The so-called widowmaker March/April spread settled Tuesday at plus 27.4 cents, but it traded to a three-month low of 23.7 cents earlier in the session.

“March/April would not be trading at a three-month low if winter were looking to draw down on supply, or if it was going to be so cold that demand was going to turbocharge demand,” Yawger said. “Nobody is expecting either of those things to happen.” 

Prices are expected to remain volatile this week. EBW Analytics Group said although options and expiration are likely to bring about big swings at the front of the futures curve, Henry Hub cash prices are likely to stay above $3.00 This increases the odds that the November Nymex contract will go off the board Wednesday “at a price with a $3 handle.”

Zeta Watch

Fundamentals took a back seat in Tuesday’s price action, but there were some major developments on supply/demand balances.

First, production took a big hit as Hurricane Zeta continued churning in the Gulf of Mexico (GOM). In the 4 p.m. CT update, the National Hurricane Center (NHC) said Zeta, which made initial landfall on the Caribbean coast of the eastern Yucatan Peninsula late Monday, was packing maximum sustained winds near 65 mph with higher gusts. On the forecast track, the center should move over the central GOM Tuesday night and approach the northern Gulf Coast on Wednesday. The storm was projected to make landfall within the hurricane warning area from Morgan City, LA, to the Mississippi/Alabama border before moving inland across the southeastern United States early Thursday.

Producers began evacuating personnel from offshore platforms earlier in the week. Based on 38 reports filed with the Bureau of Safety and Environmental Enforcement (BSEE) before noon on Tuesday, 1.50 Bcf/d of natural gas, which is more than 55% of the total gas production in the GOM, had been shut-in. Close to one-half of the oil produced, or 914,811 b/d, also was shuttered.

Companies said they had evacuated personnel from 154 manned production platforms, about one-quarter of the total in operation, according to BSEE. In addition, personnel had been evacuated from three of the 10 nondynamically positioned rigs. Another nine of the 16 dynamically positioned rigs in the GOM were moved off location as a precaution ahead of Zeta’s projected path.

Genscape Inc. said dry gas production also declined further to 447 MMcf/d. Since Saturday, receipts have declined significantly on Destin Pipeline (down 200 MMcf/d), Nautilus Pipeline (down 257 MMcf/d), Transcontinental Gas Pipe Line (down 201 MMcf/d) and Discovery Gas Transmission (down 191 MMcf/d). Destin and Nautilus have issued notices related to Zeta and continued to evacuate nonessential personnel from their platforms, according to Genscape.

On the demand side, NGI data showed feed gas deliveries to U.S. liquefied natural gas (LNG) export terminals slipping more than 250,000 Mcf day/day to around 8.85 Bcf.

EBW pointed out that access to the Calcasieu Ship Channel was still restricted to vessels with no more than a 36-foot draft, preventing Cameron LNG from returning to normal operations. Over the past several days, several LNG tankers have been allowed to dock at the terminal and were partially loaded. To comply with the draft limitation, however, they were forced to depart partially laden. The Wilpride LNG vessel, meanwhile, has been forced to remain anchored in the GOM.

“As a result, LNG feed gas flows have been limited to 1.25 Bcf/d, at least 1 Bcf/d below maximum capacity if all three trains at Cameron operate at full capacity,” EBW said.

The U.S. Coast Guard has not indicated when restrictions may be lifted. A contractor was hired to remove the sunken barge limiting access, but a complete removal is not expected until mid-November.

“The Bayport Dredger, however, has been continuing to work in the area near the barge,” said EBW. “It is possible, therefore, that restrictions on access will be relaxed much sooner, potentially even this week.”

Gas Restrictions

Spot gas prices were mixed Tuesday as a strong early-season polar front continued to impact the interior West and Plains with rain, snow and frosty temperatures. Temperatures fell as far south as Texas, with overnight lows in the northern part of the state falling into the 10s and 20s, according to NatGasWeather.

The East was expected to remain warm through Thursday but then cool a bit beginning Friday as colder-trending weather systems with rain and snow tracked through, NatGasWeather said. The cold blast is forecast to be focused over the Northeast, according to the forecaster. Numerous heating degree days were added to the forecast as lows were projected to drop into the 10s to 30s.

“However, recent weather data continues to favor the tap of cold air from Canada will shut off mid next week into the following week, resulting in highs warming into the 50s to 80s over most U.S. regions to keep the eight- to 15-day period solidly to the bearish side,” NatGasWeather said. “Although, we do caution the weather data is likely too bearish for the Nov. 4-10 period and could add demand in time.”

Despite the cooler weather in Texas, spot gas prices were lower since the lower temperatures mean less air conditioning use, rather than increased heating. Katy slipped 3.5 cents to $3.035.

However, Permian markets continued to recover from recent lows, with some deals seen above $3.00. El Paso Permian next-day gas jumped 82.5 cents to average $2.890.

Midwest prices were lower across the region, falling 11.0 cents to $3.030 at the Chicago Citygate. Prices in the Midcontinent were mixed. Northern Natural Ventura plunged $2.815 to average $2.975 as the pipeline issued a safe operating limit across its market zones because of the chilly weather. Several constraints also remained in place across the system.

Genscape said Northern Border Pipeline Co. issued a force majeure effective Monday that is limiting southbound flow through North Dakota by up to 168 MMcf/d until further notice. This flow restriction effectively limits upstream receipts into the pipeline.

Because of “emergent equipment failure, capacity at the throughput meter Flow Past Glen Ullin will be reduced to 2,327 MMcf/d until further notice,” Genscape analyst Anthony Ferrara said. “Over the past 30 days, flows through Flow Past Glen Ullin have averaged 2,200 MMcf/d and maxed at 2,495 MMcf/d.”

Ferrara also said as of Tuesday’s (Oct. 27) evening cycle, production at Bearwallow on the Rockies Express Pipeline (REX) had completely shut in. Receipts dropped 683 MMcf/d day/day, and the meter had averaged 639 MMcf/d for the 14 days prior to the outage.

In the Northeast, production was relatively flat day/day at 32.4 Bcf/d, although Monday’s production numbers were revised up by 553 MMcf/d, according to Genscape. Spot gas prices in the region were mixed, with most hubs posting small changes day/day. Tenn Zone 4 200L was the exception, tumbling 27.0 cents to $2.580.

In the West, Gas Transmission Northwest issued a force majeure because of emergent and unplanned compressor station repairs at the Eastport Compressor Station 3 near the Canadian border in Boundary County, ID. Capacity at its Flow Past Kingsgate throughput meter was reduced to 2.23 Bcf/d effective Tuesday.Flows fell 285 MMcf/d day/day to 2.25 Bcf/d, although this constraint was only 88 MMcf/d below the 14-day average, Genscape analyst Josh Garcia said. The drop in flows closely corresponded with the drop in Canadian imports at the Kingsgate interconnect with the Foothills British Columbia pipeline. There was no estimated return to service, but Kingsgate fell 31.5 cents to $2.685 for Wednesday’s gas day.