Natural gas futures traded both sides of the $4.00/MMBtu mark on Monday as bullish weather forecasts and persistently sagging storage levels quickly reversed the losses from late last week. The September Nymex gas futures contract hit a $4.042 intraday high but ultimately finished the day at $3.935, up only 2.1 cents from Friday’s close.
At A Glance:
- Heat sparks Nymex futures rebound
- California temperatures flirt with century mark
- End-October storage seen short
Spot gas prices also recovered despite weak weather demand in store for this week, particularly on the East Coast. NGI’s Spot Gas National Avg. climbed 17.0 cents to $3.915.
Temperatures over the next week are expected to be generally moderate thanks to a series of wet weather systems sweeping across the eastern half of the country. However, traders on Monday focused instead on the longer-term outlook that showed heat returning in a big way by next week. Bespoke Weather Services said stronger ridging was showing up in the latest weather models for the eastern United States, giving a boost to temperatures in the Midwest and East.
“Next week’s peak highs will reach the low to mid-90s for most areas from Chicago to New York City and points south,” Bespoke said. “As the forecast stands currently, this would actually make next week the hottest of the summer, nationally, beating out last week by a few gas-weighted degree days.”
The toasty outlook likely means that storage inventories are likely to continue struggling to refill to levels deemed adequate for the winter season. Powerhouse Brokerage LLC noted that the average rate of injections into storage is 13% lower than the five-year average so far in the refill season, which runs through Oct. 31. The firm said new demand is outstripping supply, especially for power.
The Energy Information Administration last week said that stocks as of July 23 were at 2,714 Bcf, which is 523 Bcf below year-ago levels and 168 Bcf below the five-year average.
“If the rate of injections into storage matched the five-year average of 8.4 Bcf/d for the remainder of the refill season, the total inventory would be 3,551 Bcf on Oct. 31, which is 168 Bcf lower than the five-year average of 3,719 Bcf for that time of year,” said Powerhouse’s Alan Levine, chairman.
Energy Aspects projected an even lower level of stocks for the end of October. The consultancy said inventories would likely sit at only 3.52 Tcf, which is notable since July tracked about 7% cooler than normal on a national basis.
Assuming 10% fewer-than-normal cooling degree days (CDD) starting Aug. 12 through end-October, power burn would save only 0.6 Bcf/d per Energy Aspects’ model, or about 50 Bcf.
The other side of the equation would “force a market reckoning,” according to Energy Aspects analysts. A 10% hotter-than-normal weather pattern would remove 0.7 Bcf/d from stocks, sending Henry Hub prices soaring to avoid an end-of-season carryout below 3.5 Tcf.
The “wild card” for weather is hurricanes, the Energy Aspects analysts said. The risk is now “heavily skewed” to the demand side given the proliferation of Gulf Coast LNG terminals. “The most impactful hurricanes did not make landfall until late August 2020, meaning there is still the risk of storms to have a late-summer loosening effect on balances.”
At this point, Energy Aspects analysts said they find it hard to envision a scenario in which the market heads into the heating season with stocks above 3.6 Tcf. Reaching that threshold would require no extension of heat into September, and perhaps October, as well as a marked production response and gas relinquishing market share back to coal once overall loads have lowered after peak cooling season.
“There are too many unknowns and potential disruptions — more unplanned operational production disruptions, heat waves further down the forecast, etc. — to block a more stable end-October carryout,” Energy Aspects analysts said.
Given the dire situation shaping up for storage, EBW Analytics Group LLC pointed out that while the Nymex futures strip has enjoyed quite the rally in recent weeks, a major open issue facing the gas market is the potential further strength of the winter-month contracts. During the past two weeks, the winter-month contracts have often risen slightly more than the front-month in early morning trading, helping to lead the near-month contracts higher. With the potential for storage to sink to dangerous levels during the winter, however, the premium for the winter-month contracts remains surprisingly low.
EBW analysts noted that there is a spread of only around 23 cents between September and January, an average spread of under 5.8 cents. This narrow spread, they said, may be at least partly attributed to hedging by natural gas producers selling the 2022 strip.
“Last week, however, January reached as high as $4.362 intraday,” EBW analysts said. “As hedging by end users increases, winter-month prices could strengthen, helping to support the fall contracts.”
Hot West Coast
Double-digit gains were the norm across U.S. cash markets on Monday, with West Coast markets leading the gains as hot weather was seen continuing in the region.
The National Weather Service (NWS) said hot, dry and windy conditions were expected to continue through at least Thursday, with widespread triple-digit temperatures forecast for the interior areas of California. Highs were forecast to hit 104 degrees in Woodland Hills and 94 in Anaheim.
RBN Energy LLC analyst Jason Ferguson noted that a pipeline outage in Mexico was pushing back on flows from the United States. This has further constrained the El Paso Natural Gas Pipeline South Mainline.
Elsewhere in the West, the NWS said some areas were set to receive heavy amounts of rain this week given the seasonal monsoon in the region. Over the next couple of days, the focus of the monsoonal rainfall is forecast to gradually shift from the Intermountain/Great Basin region eastward to mainly along the spine of the Rockies as an upper ridge re-establishes over the Desert Southwest. By Wednesday, the monsoonal rain should be confined to the vicinity of the central and southern Rockies, according to NWS.
A handful of Rockies markets started to soften on Monday, but the majority of pricing locations moved up by at least a dime. Cheyenne Hub next-day gas climbed 15.5 cents to $3.7500.
Wood Mackenzie said a force majeure scheduled to begin Tuesday at Natural Gas Pipeline Co. of America’s (NGPL) compressor station 303 in Angelina, TX, would limit flows in the region. The restrictions are to continue until Aug. 26, limiting primary flows by a certain percentage and some secondary flows completely.
The Corpus Christi and Sabine Pass LNG terminals receive feed gas through NGPL; however, Wood Mackenzie noted that both facilities have other options for sourcing their feed gas.
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