A chillier weekend forecast lifted natural gas futures back above $4.000/MMBtu early in Monday’s session. The gains, however, were not to last as subsequent weather data backed off the cold and sent the January Nymex gas futures contract tumbling 13.1 cents to $3.794. February slid 12.8 cents to $3.761.
At A Glance:
- Robust power burns fuel demand
- Production hangs in recovery mode
- Cash prices jump across Lower 48
Spot gas prices were higher to start the week despite mostly mild conditions across the country. Gains were strongest out West with a Pacific storm in place, which helped boost NGI’s Spot Gas National Avg. up 45.5 cents to $4.175.
After hinting that temperatures could finally turn a bit more wintery, the weekend weather models shifted a little colder, showing enough chill in the pattern to bring demand closer to normal in the latter part of the month. From here, the key would be to see if models move toward an actual colder pattern, according to Bespoke Weather Services. This is possible, the forecaster said, given a healthy blocking signature showing up in the North Atlantic Oscillation region. However, much depends on the Pacific side, so Bespoke is holding a neutral view for now.
NatGasWeather said the weather data does still bring an increase in demand this weekend and continues to show very cold air over Western Canada Dec. 27-31, teasing the northern United States. Overall, the timing of swings in national demand and major features remain intact, and the midday Global Forecast System did gain several heating degree days (HDD) Dec. 24-26 by forecasting a slightly stronger cold shot into the northern United States, according to the forecaster.
“But what we expect will be most important going forward is how much Arctic air over Canada Dec. 28-31 is able to bleed into the northern United States,” NatGasWeather said.
Until then, national demand is expected to be much lighter than normal for the current week, “by a lot,” according to the firm. Demand is expected to be so low that next week’s government inventory report is likely to be more than 70 Bcf lighter than normal.
EBW Analytics Group also noted the very mild near-term outlook, cautioning that Wednesday and Thursday of this week may each feature 10 heating degree days (HDD) below normal, constraining attempts to rally. As the market bridges extreme near-term warmth and turns its focus to a colder late-December that could add 17 Bcf/d of weather-driven demand in two weeks, further upside for the Nymex winter contract appears likely as a long-awaited relief rally sets in.
“The extent of gains, however, may pale in comparison to the $1.79/MMBtu loss in the January contract’s first six trading sessions as the front month,” EBW’s Eli Rubin said. “While north of $4.00/MMBtu is likely, momentum may stall at the 200-day average at $4.17/MMBtu.”
Meanwhile, the supply picture continues to improve, limiting the potential for any massive gains to be sustained. Early estimates for this week’s storage report are pointing to a withdrawal between 77 Bcf and 93 Bcf. NGI modeled an 89 Bcf draw.
This would compare with the 118 Bcf withdrawal the Energy Information Administration recorded in the year-ago period and the 114 Bcf five-year average pull.
Looking ahead to the remainder of winter, Energy Aspects said about 200 Bcf of gas could go back toward storage by the end of 1Q2022 if its estimate for winter residential/commercial demand — which has fallen by 1.3 Bcf/d since the start of November — pans out. This is in line with the firm’s pre-winter weather scenarios forecast, which posited that a 5% warmer winter would boost storage by 350 Bcf.
“We have lost half that demand already from weather impacts,” Energy Aspects said. “If 1Q2022 HDDs are in line with historical averages, the currently forecast moderate December would drag the entirety of the heating season to 2% warmer-than-normal (November realized nearly in line with normal HDD levels).”
However, the price response to December’s weather runs is acting as a constraint on how much end-March 2022 inventories may inflate, according to the consultancy. Rising forecasts for power burn have eaten into 140 Bcf of the lost weather demand from Nov. 1 through the end of December as cash prices have crashed.
Energy Aspects said gas burn last week grew by 0.9 Bcf/d from the prior week, with thermal generation meeting all of the week’s 3% week/week load growth. “Should low cash endure, gas will look increasingly attractive and will grow its share of thermal generation to further limit how much end-of-season inventory projections will rise.”
Meanwhile, export demand is expected to remain strong throughout the winter overall, mostly because of liquefied natural gas (LNG) exports, but there could be some fluctuations. For example, Wood Mackenzie said U.S.-to-Mexico gas pipeline exports (aka Mexports) are nearing the 5.7-Bcf/d mark, up 3% from November. This increase in volume broke the primary downtrend that commenced in July and averaged 4% in month-over-month (MOM) terms.
“The decline in border flows was in part driven by a rainier-than-expected summer,” said Wood Mackenzie analyst Ricardo Falcon. “Rallying U.S. benchmarks played a role too, especially from early September to mid-November when near-record highs were accompanied by strong volatility.”
Gas burns for power generation, the largest demand component in the Mexican market, dropped by an average 7% MOM during that period, according to Wood Mackenzie. This month, however, power burns are rebounding by 5% to slightly over 3.7 Bcf/d.
“The price effect is visible: milder winter forecasts are driving a plunge in U.S. benchmarks, contributing to cyclical increments in gas-fired generation and thus in Mexports,” Falcon said.
The gradual return of combined-cycle and turbogas assets from shoulder-season maintenance is factoring in, as well, according to the analyst. Downside risk is nonetheless still considerable, particularly for the second half of December when the holidays are expected to induce extra weakness on aggregate demand.
“For now, the Mexican gas market’s exposure to a potential supply-demand shock seems lower than it was a few weeks ago,” Falcon said.
On the LNG front, feed gas demand recovered over the weekend to 12.4 Bcf/d, up 1.2 Bcf/d from last Tuesday’s lows. EBW noted that Sabine Pass still could add 0.5 Bcf/d of demand from current levels as the Train 6 startup continues, “firming the late-month fundamental outlook.”
Rains, Chills, Winds — Oh My
Spot gas prices climbed across the board Monday as the power burns remained strong in spite of moderate temperatures. Gains were fairly plump at most U.S. locations, coming in between 20 and 30 cents at several key pricing hubs.
Price increases were sharply higher out West, though, as a messy storm system was seen barreling across the region.
The National Weather Service (NWS) said an elongated mid-level low is currently digging southward along the California coast, propelled by a very strong 160-180 mph upper-level jet that extends from southern Alaska to the storm. This jet energy is expected to transfer to the mid-level low and accelerate it into southern California late Tuesday before shifting across the Colorado Rockies on Wednesday.
Along the way, heavy rains are expected in southern California along with cold air across the Sierra Nevada, according to the forecaster. Significant snows are forecast for the Great Basin and parts of the Northern Rockies (Idaho, Southwest Montana) with 1-3 feet possible.
As the mid-level low heads deeper into the Rockies and New Mexico, NWS said winds are to quickly accelerate. Well above-normal temperatures are expected to follow suit, with high temperatures into the 60s across the Central Plains and in the 70s across the Southern Plains, which is near records and 25-35 degrees above normal. By midweek, the balmy temperatures — some 35-45 degrees above normal — are forecast to reach the Midwest and southern Plains.
“A vast majority of record highs” are forecast “to be broken, with possibilities of record all-time December high temperatures possible in some cities,” NWS said.
For now, the messy storm system was providing a major boost to spot gas prices on the West Coast. Northwest S. of Green River next-day gas shot up $1.095 to average $5.270. El Paso S. Mainline/N. Baja blasted $2.220 higher to average $6.895 for Tuesday delivery.
In California, the SoCal Border Avg. was up $1.770 to $6.375.
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