• March futures slip as weather models lack clarity on additional cold
  • Storage seen rapidly falling to sharp deficits in the coming weeks
  • Cash prices return to more normal levels as temperatures warm

Natural gas futures were down sharply in early trading Monday, pressured by a warmer weather outlook and production coming back online following last week’s cold-related disruptions. The March Nymex contract was down 13.8 cents to $2.931/MMBtu at around 8:50 a.m. ET.

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After a week in which the term “volatile” may be the understatement of the year, natural gas prices in both the futures and spot gas markets ended Friday on a much quieter note. Still trying to digest the past week’s crippling Arctic blast and the long-term implications it may have on natural gas, traders pushed the March Nymex gas futures contract down 1.3 cents to $3.069. April finished at $2.991, up 2.1 cents.

Spot gas action continued to slow as temperatures throughout the Midcontinent and Texas were forecast to climb from the record lows experienced over the past week. NGI’s Spot Gas National Avg. fell $4.385 to $4.475.

An unbelievable week in the natural gas market that all started with an Arctic blast that gripped the country’s midsection down into Texas fittingly ended with power restored to nearly all Texas homes and businesses. That said, the storm, on a more figurative level, is far from over. The lack of clarity was likely what kept futures traders content with leaving their positions relatively intact ahead of the weekend.

“It’s difficult to know if futures are trading on impacts from the recent/current Arctic blast or are looking to late February and early March patterns to decide if April prices are worthy of $3 or not,” said NatGasWeather.

If the latter, the forecaster said there is more cold weather forecast late in the coming week. The latest Global Forecast System (GFS) was trending even colder across the central and northern United States, and it was also a little colder into the Northeast March 1. However, the model was “a bit too mild” over most of the country March 3-6.

Statistically, the GFS is cold enough overall, according to NatGasWeather, “but with the obvious flaw of it not being cold enough on the back end for March 3-6. However, it wouldn’t take much of a shift south with colder Canadian air lurking just across the border to bring a rapid increase in demand.

“This makes it a dangerous weekend to hold because any colder trends and the pattern will look increasingly bullish, especially if they were to occur for March 3-6,” the forecaster said.

Bespoke Weather Services said rather than the nuances of the weather models, the market may be focused on how long production may be offline. Some estimates point to curtailments of more than 20 Bcf. The forecaster said the return of power to most of Texas indicated “things could be back to normal sooner than later.” This, it said, is why the March-April Nymex spread was narrowing.

“Once back to normal, it is highly unlikely you get cold enough in March to generate these same issues,” Bespoke said.

Production levels continued to be revised lower, with output on Wednesday falling below 70 Bcf after revisions, according to Wood Mackenzie. This was the first time production had dropped below 70 Bcf since January 2017, it said. Of course, there may be a fair amount of associated gas in the Permian Basin and on intrastate pipelines that was being delivered directly to meet local demand rather than showing up as production in Wood Mackenzie’s models.

At the pipeline level, the firm continued to see several forces majeure, operational flow orders and “human needs” requirements still in effect. For example, Tres Palacios power was restored, but its force majeure remained in effect and it continued to limit withdrawals.

Bespoke said assuming no additional deliverability issues, the rapid decline in storage in the past few weeks — and increased momentum still to come — was bullish for March and April gas prices. March weather still looked variable, according to the firm. However, with many estimates creeping down toward 1,400 Bcf for end-of-season storage, “it is hard to move prices too much lower at least until we do see production comfortably higher.”

Since it’s difficult to determine when that may occur, traders should exercise caution, especially with expiration of the March contract in the coming days, Bespoke said. “Our guess is we ‘play’ in some range from roughly $2.95-3.25, so option strategies may work better versus a flat price in this situation.”

Analysts at Tudor, Pickering, Holt & Co. (TPH) on Friday continued to analyze the latest government storage data, which came in far less steep than the market had been expecting. The Energy Information Administration (EIA) on Thursday said inventores for the week ending Feb. 12 fell by 237 Bcf, rather than the 250 Bcf projected by the market. Despite the bearish miss, the EIA figure was much larger than the year-ago 141 Bcf draw and the 142 Bcf five-year average.

Total working gas in storage stood at 2,281 Bcf as of Feb. 12, down 105 Bcf from year-ago levels and 57 Bcf above the five-year average, EIA said.

TPH noted that although the latest stat may have been disappointing, stocks are poised to fall considerably in the coming weeks. For the coming EIA report, TPH is modeling a 12 Bcf/d week/week decline in production, with liquefied natural gas demand down 6 Bcf/d and residential/commercial demand up 5 Bcf/d.

“We also saw record Canadian imports, reduced flows to Mexico and a drop in industrial demand as gas was prioritized for essential services,” the TPH analysts said. “We’re almost certainly going to get this one wrong, and early modeling points to a draw of 320 Bcf, but we’ll reserve the right to revise this as data is updated.”

TPH analysts said while it’s unlikely that the upcoming report breaks the record 359 Bcf weekly draw reported in 2018, it should “officially move us below the five-year average for the first time since 2019 as the bullish setup continues to deepen.”

Wood Mackenzie also pointed out a record reached at the Dawn storage hub in Ontario, where inventory levels dropped below the five-year average for the first time since 2019. Inventory levels were “constantly setting new record highs” throughout the second half of 2020 and entered 2021 still above the five-year average. However, because of the cold weather in the Midwest, especially over the past two weeks, significant withdrawals became necessary.

“Our data currently shows that there has been an average weekly withdrawal of 23 Bcf/d for each of the past two weeks,” said Wood Mackenzie analyst Anthony Ferrara. As of Thursday (Feb. 18), “storage levels are sitting at 102 Bcf, 21 Bcf below the five-year average, 50 Bcf below the five-year high and 4 Bcf above the five-year low.”

Back To Normal

Price action in the spot gas market reverted back to more typical patterns experienced in winter, with the highest prices being fetched in the Northeast, rather than the middle of the country.

That’s largely because another, yes another, winter storm was heading toward the Midwest, Great Lakes and portions of the Northeast early in the week, according to AccuWeather. Mother Nature may be a bit forgiving this time around, though, with forecasters expecting snow amounts to be lower and little threat of ice. The South that suffered her wrath over the past week also is likely to be spared.

Snow was forecast to develop beginning Sunday as low pressure tracked from Missouri into Illinois. Along and north of the low track, accumulating snow was expected to fall, AccuWeather said. Snow was forecast to move farther to the east late Sunday, with much of New England, New York and northern/central Pennsylvania to receive accumulating snow Monday. Close to the East Coast, it could be a different story.

“Based on the current forecast track of this system, cities along the Interstate 95 corridor such as Washington, DC, Baltimore and Philadelphia will likely end up with mostly rain, but if this storm tracks a bit farther south, then these locations could end up with a slushy coating of wet snow,” said AccuWeather.

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Nevertheless, prices on the East Coast came off earlier highs, though they still commanded a sharp premium to markets farther west. Algonquin Citygate prices for gas delivery through Monday averaged $6.670, down $2.105 from Thursday’s levels. Transco Zone 6 NY was the only hub in the Northeast and Appalachia that landed in positive territory, tacking on $1.185 to average $7.055.

Appalachia prices averaged mostly in the $3.000-4.000 range.

Similar pricing was seen in Louisiana, where Henry Hub spot gas dropped $2.510 day/day to $4.985.

Spot gas at the now infamous OGT in Oklahoma averaged $3.415 for the three-day gas period, falling $10.285 from Thursday’s levels.

Texas cash was still all over the board despite posting sharp declines day/day. Waha traded as high as $8.000, while Houston Ship Channel topped out at $4.000. Losses across the Lone Star State ranged anywhere from 70.0 cents to $93.870.