After four solid weeks of steep increases, natural gas forward prices buckled during the trading period ending Tuesday as the start of the fall season ushered in cooler weather and a decline in gas demand. October prices plunged an average of 54.0 cents from Sept. 16-21, while November tumbled 55.0 cents on average, according to NGI’s Forward Look.
The hefty price discounts extended through the winter strip as the milder weather outlook was seen leading to a string of much larger storage injections than the ones that amassed over the summer. The November 2021-March 2022 strip came off an average 52.0 cents for the period, Forward Look data showed. Summer prices also were lower by an average of 13.0 cents.
Given the quick and steep climb the Nymex futures strip experienced over the past month, at least some pullback was expected in spite of an otherwise supportive backdrop. The arrival of crisper weather across the Lower 48, though, accelerated the declines as temperatures as far south as Texas were forecast to slip to more comfortable levels following the long sweltering summer.
Bespoke Weather Services said though weather is not a key theme for the gas market this time of year, “it is rather difficult to draw up a lower demand setup into early October.” The 15-day forecast features warmth in locations that normally see heating degree days, and there is a lack of heat down in the South/Southeast that is resulting in few cooling degree days.
“Our lean remains that warmer La Niña influences win out in October as a whole, keeping the risk skewed toward low demand even beyond the current 15-day outlook,” Bespoke said.
On Tuesday, the October Nymex gas futures contract stood at $4.805/MMBtu, off from the prior Wednesday’s peak settlement of $5.460. The winter strip dropped to $4.890, while the summer 2022 package averaged $3.630.
LNG Demand Down Too
Along with the seasonal decline in temperatures, liquefied natural gas (LNG) demand also has fallen from recent highs despite continued robust demand overseas.
The Cove Point LNG terminal near Lusby, MD, shut down on Monday for planned maintenance that is scheduled to last until Oct. 10.
Volumes also had been lower at the Freeport LNG facility after it lost power during Hurricane Nicholas. The storm made landfall near Matagorda Bay, TX, earlier this month.
Freeport had begun to restart the facility over the past weekend (Sept. 18-19) but ran into some electrical issues. By Wednesday, though, it was receiving about 2 Bcf of feed gas.
The restart of operations at Freeport comes as global LNG demand remains fierce. Asian buyers are pricing gas at exorbitant rates in order to gobble up enough supplies ahead of winter. The market was left woefully short last year.
Europe, meanwhile, has struggled to compete with Asia as it works to replenish storage inventories left short after last winter. A hot summer added to the decline in supply.
The feverish demand and resulting global price spikes have attracted the attention of the International Energy Agency, which called on Russia this week to increase gas availability to Europe, underscoring “its credentials as a reliable supplier to the European market.”
Gazprom PJSC recently completed the controversial Nord Stream 2 (NS2) pipeline and is working to bring it online by the end of the year.
The extreme tightness and sky high gas prices in Europe are eerily similar to the drama that unfolded in Texas last winter during Winter Storm Uri. Several gas suppliers in the region have folded amid the energy crisis.
With domestic prices on the decline, that means U.S. LNG is even more in the money to send supplies of the super-chilled fuel overseas. Analysts see export demand remaining strong throughout the winter months, even with two more LNG export facilities scheduled to come online during that time.
Bearish Technical Drivers
EBW Analytics Group said the abrupt price reversal for natural gas as bulls ran out of steam has led to a bearish technical setup, and the firm sees prices likely continuing to move lower in the next few trading sessions.
EBW analysts acknowledged that fundamentals indeed had turned decidedly bearish. The mild weather shift, rising gas production in the wake of Hurricane Ida, sliding LNG demand and last week’s bearish storage report all contributed to a softening backdrop for natural gas.
“But the move lower is predominantly technically-driven in the aftermath of the torrential runup over the past month,” they said.
The Schork Group noted that the October contract closed Tuesday within three ticks of its $4.802 first daily support. As for Wednesday’s price action, a drop below $4.620 would alert further weakness toward the firm’s $4.542 second support point. Below that point, the Schork Group has third support at $4.460.
“Then again, strength above $4.997 opens the door to our $5.083 second level of resistance,” it said. “Through here, we will look for resistance to hold at $5.177.”
Price action on Wednesday was rather tame, with the October Nymex contract settling flat on the day. November edged up to $4.855.
“Eventually, a brief turn colder is likely to reinject an element of fear — and resurgent winter risk premiums — into the market, even as the most-likely scenario continues to favor average prices in the low-$4.00 range,” EBW analysts said.
For now, Thursday’s government storage report may offer the next catalyst for prices, especially if recent loosening is confirmed. The Energy Information Administration’s (EIA) last two reports have come in bearish to expectations, though inventories remain far below levels that are typical levels this time of year.
As of Sept. 10, inventories stood at 3,006 Bcf, which is 595 Bcf below year-ago levels and 231 Bcf below the five-year average.
Eyes On The West
Aside from the typical scrutiny on South Central stocks, which are hard to gauge because of the extensive network of pipelines that are not federally regulated and subject to the same transparency standards as other systems, some market observers may also be looking to see whether inventories in the Pacific region actually grow.
Oppressive summer heat has boosted gas demand across the West, while an ongoing drought in the region has created supply issues when water levels fell so low last month that a large hydroelectric power plant had to shut down. The region, and Californian in particular, has had to resort to increased power imports, which often come from gas-fired power plants.
The situation has worsened to the point where the Department of Energy recently approved an additional 200 MW of gas-fired power to be called upon when needed in order to avoid a crisis. Withdrawals from the Aliso Canyon storage facility, which are rare since a leak was discovered at the facility in 2015, also have taken place in recent weeks.
On Sept. 10, after pulling another 3 Bcf from storage, Pacific stocks stood at 240 Bcf, about 23% below year-ago levels and 18% below the five-year average, according to EIA.
The tight conditions have led to volatile trading throughout the West, most notably in California. Both cash prices and forward curves have mounted huge gains in recent weeks and despite a pullback along the forward curve in recent days, a steep premium remains in place.
SoCal Citygate October prices fell 27.0 cents from Sept. 16-21 but still sat at $7.851, more than $3.00 above Henry Hub, according to Forward Look. SoCal Citygate November tumbled a far more substantial 57.0 cents to $9.548, while the winter strip was down 40.0 cents to $10.790. Summer 2022 prices averaged $6.35, off 15.0 cents on the week.
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