Natural gas futures broke through $6.000/MMBtu for the second time this week as U.S. production took a notable step down on Tuesday at the same time global supply concerns roiled the domestic market. The November Nymex gas futures contract surged 54.6 cents to settle at $6.312. December gas finished at $6.432, up 52.6 cents on the day.

Forward Fixed Price Curve

At A Glance:

  • Global factors at play in latest U.S. gas price rally
  • Power burns still strong as coal exhausted
  • Cash prices soar on curbed production

Spot gas prices also continued to mount hefty increases despite a generally mild weather pattern in place across the country. Stubbornly strong power burns lifted NGI’s Spot Gas National Avg. up another 32.0 cents Tuesday to $5.970.

Though the domestic supply picture has vastly improved over the past month, several maintenance events — common during the shoulder season — resulted in a steep decline in output across the country.

Wood Mackenzie said top day production data showed production falling around 1.7 Bcf/d day/day to 91.2 Bcf/d early Tuesday. North Louisiana led the declines as production slid about 335 MMcf/d along the Tennessee Gas and Gulf South pipelines.

Wood Mackenzie analyst Laura Munder said Gulf South began maintenance Tuesday at Carthage Junction, which is expected to impact upstream expansion receipts, and at the Magasco Compressor Stations, which would impact West 30 from Magasco to South TX (Delivery). Both maintenance events are expected to continue until Friday.

Tennessee does not have planned maintenance underway, “but the drop is localized at one gathering system interconnect, so it is likely unreported field work,” according to Munder.

In the New Mexico portion of the Permian Basin, Transwestern Pipeline began annual testing at the WT-1 Compressor Station in Carlsbad, reducing capacity from around 630 MMcf/d to about 280 MMcf/d until Friday.

Overall Rockies production was down about 300 MMcf/d, with the largest drop in the Denver-Julesburg Basin along Colorado Interstate Gas. Munder said there is no associated maintenance with the production cut.

Even with the steep drop in output, declines are expected to be temporary and could fluctuate throughout the fall season, before any significant cold weather arrives.

‘Feast Or Famine’

Meanwhile, gas needed by export facilities is also well off prior highs. Though Europe and Asia continue to set price records almost daily as the two regions battle it out for limited gas supplies, U.S. feed gas demand has struggled to achieve the lofty levels of the summer.

The Cove Point, Freeport and Corpus Christi LNG export terminals are all taking in less feed gas this week as various maintenance is underway. NGI data showed deliveries to all U.S. terminals falling below 10 Bcf on Tuesday from more than 11 Bcf on Sept. 30.

The decline in feed gas demand hasn’t stopped the price rally along the Nymex futures, though. After a temporary move above $6.00 on Monday, the November contract surged to $6.392 amid the increasingly worrisome supply situation overseas.

“This highlights tight supplies in Europe and Asia are leading other world markets higher,” NatGasWeather said.

The firm has favored U.S. prices taking the bullish path in the face of an otherwise bearish backdrop. It pointed out that every dip in U.S. prices during the past six months has been bought, while the global price spikes are further fueling the momentum.

“But we must consider, U.S. supplies have trended increasingly bearish over the past month — and will continue to do so for what’s likely to be the entire month of October,” NatGasWeather said.

For now, this is having little effect on U.S. prices as they follow global prices/uncertainty, according to the firm. With tight supplies in Asia and Europe set to continue, “extremely dangerous/volatile” price swings in the coming weeks/months are expected, “where entry and exit will be feast or famine.”

EBW Analytics Group also highlighted recent trading activity in a note to clients on Tuesday. The firm’s analysts said while the European premium to Nymex futures was around $5.000 as recently as July, global shortage pricing has sent winter premiums to Nymex gas north of $30.000. In a probability-based scenario approach EBW took when analyzing winter Nymex futures, even a 5% chance of a $30.000 spike could equate to a $1.500 risk premium, according to analysts.

“Although the chances of a spike to global LNG pricing appears slim, the surge in Title Transfer Facility futures remains a key early-winter driver for Nymex gas,” the EBW team said. “At a 5% risk of price convergence, if global prices were to approach $100.000” as floated in a recent Citigroup Inc. market note, “Nymex risk premiums could quickly rise another $3.000.”

What’s The Forecast For Winter?

What’s likely to matter most going forward is whether temperatures in Europe, Asia and the United States will be warmer or colder than normal for November and December.

Though still too early to say with certainty, weather models and the base La Niña state indicate that October is still on track to rival October 2016 in terms of lowest demand, according to Bespoke Weather Services. The only chill in the pattern over the next couple of weeks is focused in the interior West, with the eastern half of the nation “very, very warm.”

[Actionable Insight: Did you know that NGI is one of only two Price Reporting Agencies that include trade data from the Intercontinental Exchange? Find out more.]

The forecaster expects this low-demand pattern to continue into late month, “if not all the way into at least the start of November.”

As for Europe, Maxar’s Weather Desk expects below-normal temperatures blanket the Southeast and into the Continental region. Above-normal temperatures are forecast in northern and western Europe.

“The pattern gains influence from a ridge aloft centered in and around the British Isles while upper-level troughing observed toward the Southeast” in the six- to 10-day period remains in place, according to the forecaster. “The ensemble models are in generally good alignment of the pattern there,” though the Canadian Ensemble data set offers a warm risk to the forecast in northern Germany and western France.

The Maxar team said the 30-day and 60-day composite outlook for Asia continues to feature near-normal temperatures across Japan. “However, risks are cooler across the country in both October and November.”

Cash Still Climbing

Spot gas prices continued to swell on Tuesday as power burns continued to fire on all cylinders despite the lack of strong weather-induced demand. With coal usage all but exhausted in power generation, gas being used for power generation has remained strong throughout the summer and even so far this fall despite the much higher gas price environment.

Independent analyst Celsius Energy by Force Majeure said power burn came in at 36.0 Bcf on Monday, up 6.6 Bcf/d versus year-ago levels. Natural gas consumption represented a “remarkably strong” 44% of the fuel stack, thanks to weak wind output and above-average cooling demand.

“This won’t last as wind output increases, but it’s still impressive,” Celsius said.

As for prices, the Northeast put up some of the steepest increases as prices returned above $5.000 and even crossed into $6.000 territory at some locations. Tenn Zone 6 200L spot gas traded between $5.880 and $6.250, averaging 59.0 cents higher on the day at $5.995.

Tenn Zone 4 200L posted the largest climb in Appalachia, moving up 88.5 cents to $5.715. The hikes along the Tennessee system appear to be tied to the probable field work and resulting drop in production.

Prices across the Southeast and into Louisiana were up by 20-plus cents. Transco Zone 5 cash was up 23.0 cents to $6.330, while Henry Hub was up 35.0 cents to $6.225.

Similar price increases were seen throughout much of the rest of the country, while locations in California retreated from the prior day’s peaks. SoCal Border Avg. fell 10.5 cents day/day to average $6.415 for Wednesday’s gas day.