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Nymex Natural Gas Futures Expire Sharply as Lower Mild Weather Trumps Supply Cuts
Natural gas futures plummeted on Wednesday as weather models indicated that the warmer pattern that emerged following Winter Storm Elliott may stick around a bit longer than earlier projected. Though supply remains suppressed because of freeze-offs, the January Nymex gas futures contract rolled off the board 57.3 cents lower day/day at $4.709/MMBtu. The February contract, which moves into the prompt position on Thursday, tumbled 43.3 cents to $4.685.
At A Glance:
- Production starting to recover
- Warm mid-January pattern seen
- West Coast cash premiums intact
Spot gas prices continued to soften as milder weather spread across most of the country. NGI’s Spot Gas National Avg. fell $2.675 to $6.070.
The change in temperatures following the Arctic blast that blanketed the Lower 48 over the Christmas holiday has been abrupt, but the warmer air looks poised to stick around based on the latest models, according to NatGasWeather. The forecaster said high temperatures in the 30s to 50s could be reached this week in the northern United States, with some chillier weather remaining in the Northern Plains. However, highs should reach the 60s and 70s over the southern states and up the Mid-Atlantic Coast, NatGasWeather said. This should quickly sap national heating demand as the pattern is expected to be the warmest of the past 40 years.
Earlier models showed the potential for colder air to return by Jan. 9, shifting the pattern to a more seasonal level for this time of year. However, the overnight data backed off that trend as it showed cold air over Canada failing to advance as aggressively into the Lower 48. The midday Global Forecast System model confirmed the trend, with the Jan. 8-12 period now to the bearish side instead of seasonal/neutral, according to NatGasWeather.
“It was important the Jan. 9-12 period didn’t trend warmer, or it could lead to further disappointment, and that’s exactly what the overnight and latest midday weather data did,” the firm said. “It’s certainly possible recent weather data trended too warm for the coming 15 days, but it would take a considerable amount of added demand to end bearish weather headwinds.”
When Will Supply Return?
Meanwhile, production – though still far off recent highs near 100 Bcf/d – appeared to be heading toward a recovery. Bloomberg data early Wednesday showed significant increases in daily output in the Bakken Shale, Gulf of Mexico and Midcontinent region. Appalachia Basin production also started to recover.
In a televised interview with Bloomberg, EQT Corp. CEO Toby Rice said he expects his company’s output issues to be resolved in the “next couple of days.” EQT, the largest U.S. natural gas producer, saw daily production drop between 1-1.5 Bcf/d during the winter storm.
The decline occurred amid ongoing constraints in Appalachia, where Rice said water restrictions because of the drought, supply chain issues and midstream constraints combined to negatively impact third quarter 2022 production.
Meanwhile, some pipelines started to resume normal operations following Elliott’s exit, which may aid in production’s recovery. Among the systems that have lifted restrictions are Northern Border Pipeline, Panhandle Eastern Pipeline Co., Rockies Express Pipeline and Texas Eastern Transmission.
That said, Mobius Risk Group noted that production losses from the cold were some of the largest as a percentage of total dry gas output ever observed. At the peak, production was off more than 15 Bcf. Although set to return quickly with rapidly warming temperatures, there was a risk that output would be slower to recover than the market anticipated.
Equally as noteworthy, according to Mobius, was a 4 Bcf/d increase in imports from Canada. Before the winter storm, the United States was importing close to 7 Bcf/d from Canada. That figure jumped to 11 Bcf/d during the extended holiday weekend.
At the same time, there were some notable reductions in LNG feed gas demand with Cameron and Calcasieu Pass each experiencing large reductions. Before the storm, feed gas demand at liquefied natural gas terminals was running near 13 Bcf. It briefly dropped to around 9 Bcf but was back above 12 Bcf on Wednesday.
All of the factors could make accurately predicting the impacts to natural gas storage inventories difficult. Ranges were wide for Thursday’s Energy Information Administration (EIA) inventory report, which covers the week ending Dec. 23. The storage report is scheduled to be published at 10 a.m. ET on Thursday.
A Reuters survey of 11 analysts produced a range of withdrawal estimates from 169 Bcf to 218 Bcf, with a median decrease of 199 Bcf. Bloomberg had a slightly tighter range but also had a median draw of 199 Bcf, while a Wall Street Journal poll averaged a 201 Bcf pull. NGI modeled a 199 Bcf withdrawal.
For comparison, 125 Bcf was pulled out of storage in the similar week a year ago. The five-year average draw is 106 Bcf.
Notably, Mobius pointed out that while the next two EIA storage reports should prove to be substantial, the extreme warmth in the coming weeks may result in the first inventory report of the new year producing a sub-50 Bcf withdrawal.
“The stage is set in grand fashion for volatility to remain elevated as the calendar turns to the new year,” Mobius natural gas analyst Zane Curry said. “For all market participants, both naturally long and short, it is wise to note that winter is far from over. If we have learned anything thus far from the current winter it is that dynamics can change very quickly.”
Cash Continues To Retreat
Spot gas prices peeled back further on Wednesday with demand continuing to fall as temperatures rise.
The West Coast remained unsettled, with a messy weather pattern set to arrive Thursday that kept cash prices sharply elevated compared with the rest of the country. The SoCal Border Avg. dropped $6.870 day/day but averaged a hefty $19.915 for Thursday’s gas day. PG&E Citygate was down $5.035 and averaged $22.635.
Prices around $20 spread throughout the Desert Southwest and across the Rockies. There were a handful of exceptions, though. Kingsgate fell $1.630 on the day to $4.075, while Transwestern San Juan dropped $5.495 to $5.070.
The National Weather Service (NWS) said potentially excessive rainfall and heavy mountain snow would begin on Thursday as an initial wave of moisture moved onshore followed by a potent atmospheric river. Most of the potential impacts were expected across central/northern California and parts of southwest Oregon. Up to six inches of rain were forecast through early this weekend, according to NWS forecasters.
Heavy snow also is possible across the higher elevations of the Cascades and Sierra, with total snowfall up to several feet possible. Most of the snow should be confined to the highest terrain as warm Pacific air pushes snow levels high and generally above pass level. Moisture also may spread into the Intermountain West along the strong Pacific jet stream, with moderate to heavy snow possible across northern Nevada by Friday night, NWS said.
Elsewhere across the country, the vast majority of Northeast locations slid back under $6.00 for Thursday’s gas delivery. Appalachia points were below $5.00.
Notably, benchmark Henry Hub fell to $4.115 after slipping 78.5 cents day/day. In the Midwest, Chicago Citygate dropped 92.5 cents to $3.915, while in West Texas, El Paso Permian slid 49.5 cents to average only 66.5 cents.
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