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Warm January Drags Natural Gas Forwards Lower, with West Coast Leading Way
Natural gas forward prices continued to plummet during the trading period from Dec. 29-Jan. 4, this time taking West Coast markets along for the ride lower, NGI’s Forward Look showed.
After bucking the down trend that began in the final week of 2022, West Coast markets led the price declines across the Lower 48 even as a bomb cyclone pummeled the region.
February fixed prices tumbled an average of $1.070 across the country, while March dropped 46.0 cents on average, according to Forward Look. Smaller losses were seen for the summer (April-October) and winter 2023-2024 (November-March) strips.
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West Coast markets saw prices fall much further, however.
SoCal Citygate February basis plunged $2.020 through the period to finish at a $15.145 premium over benchmark Henry Hub, Forward Look data showed. With a more moderate outlook for March, basis stood $4.835 above Henry Hub.
Further out the forward curve, fixed prices for the summer at the SoCal Citygate averaged $6.460 as of Wednesday after sliding 10.0 cents lower through the period, while the winter 2023-2024 strip held steady at $8.392.
In Northern California, PG&E Citygate February basis was down 71.0 cents through the period to finish at plus $12.281, Forward Look data showed. March basis moved 20.0 cents higher, though, ending at plus $3.941. Summer prices fell 15.0 cents to average $6.290, while the winter strip slipped 7.0 cents to $7.404.
The general softening along the forward curve occurred despite a continuation of brutal winter weather that has lent a hand in the unprecedented price volatility that’s played out throughout the West this winter. What’s more, the parade of storms showed no signs of slowing.
AccuWeather said at least two people died in a bomb cyclone that struck the West Coast through Thursday. It was the second massive storm to hit the region in less than a week.
Fueled by an atmospheric river from the Pacific Ocean, the potent storm unleashed a fury of strong wind and rain across the West Coast. Gov. Gavin Newsom had declared a state of emergency ahead of the storm, and evacuation orders and advisories were issued in parts of Northern California.
More than 63,000 customers across California – primarily along the coastal counties of Northern California – were without electricity on Friday, according to PowerOutage.US.
The train of storms was forecast to continue tracking across the Pacific Ocean and toward the West Coast, according to the National Weather Service. The next system in line is forecast to enter Northern California and Southwest Oregon Friday night. By Sunday, excessive rainfall is forecast to shift slightly south toward the central portions of the state. Additional rainfall amounts of up to six inches were possible.
Notably, despite the ongoing wet weather pattern in place on the West Coast, prices in both the cash and forward markets have softened from recent highs. Even as some production remained offline because of freeze-offs in the Rockies, prices throughout the region followed the general trend.
Northwest Sumas February fixed prices fell $2.310 through the period to reach $15.666, and March dropped 45.0 cents to $5.654, according to Forward Look. The summer strip was down 21.0 cents to average $3.440, while the upcoming winter picked up a modest 4.0 cents to average $7.660.
Gas supplies, meanwhile, may be leveling off after deteriorating sharply in recent weeks.
On Thursday, the Energy Information Administration (EIA) reported that gas supplies in the Pacific region went unchanged for the week ending Dec. 30. This left stocks at 165 Bcf, which is still about 25% below year-earlier levels and around 33% below the five-year average.
In discussing the EIA’s weekly inventory report, Enelyst’s Het Shah, managing director of the online energy chat, said the holidays may have impacted demand in an otherwise frigid cold period.
The EIA reported a net 221 Bcf withdrawal for the period, lighter than the median of most major polls.
Prior to the report, projections submitted to Reuters ranged from withdrawals of 153 Bcf to 269 Bcf, with a median pull of 237 Bcf. A Bloomberg survey landed at a median pull of 240 Bcf. The Wall Street Journal’s poll found draw estimates from 156 Bcf to 265 Bcf and an average of a 228 Bcf pull. NGI modeled a 237 Bcf decrease.
EIA recorded a pull of 46 Bcf during the same week a year earlier and a five-year average of 98 Bcf.
The 221 Bcf draw “just doesn’t add up,” Shah said. It’s “definitely an extremely loose number.”
Mobius Risk Group’s Zane Curry, natural gas analyst, did not share that view.
Instead, he said comparing the latest EIA figure during the Dec. 30 reference week with a similar week of cold last year paints a different picture. Adjusting for 12 fewer degree days versus the storage week ending Jan. 27, 2022, when a 268 Bcf withdrawal was reported, and for a reasonable holiday impact suggests the storage withdrawal of 221 Bcf was not bearish at all on a weather-adjusted basis.
Broken down by region, the South Central led with a decrease of 96 Bcf, which included a 53 Bcf decline in salt facilities and a 43 Bcf draw from nonsalts, according to EIA. The Midwest and East followed with pulls of 60 Bcf and 56 Bcf, respectively. Mountain region inventories fell by 9 Bcf.
Curry noted that the hefty pull in the South Central opened up a 100 Bcf year/year deficit in this region. “This marked the first year/year deficit for the South Central since late October.”
Total working gas in storage fell to 2,891 Bcf, which is 308 Bcf below year-earlier levels and 208 Bcf below the five-year average, EIA said.
What’s Next For Storage?
With mild weather set to remain in place throughout most of January based on the latest weather models, analysts are rightfully looking ahead to the next EIA report. Early estimates pointed to much lighter withdrawals between 10 Bcf and 20 Bcf, though there are rumblings of a modest injection as well.
For the comparable week last year, EIA posted a decrease of 179 Bcf. The five-year average is 151 Bcf.
After exceptional cold during the last week of the year, and amidst the even more exceptional warmth of the current storage week, Mobius said the market is considering the odds of climbing to an end-of-March inventory level considerably above the 1.7 Tcf mark.
“If such a level is reached, the summer 2022 storage injection of approximately 2.2 Tcf becomes very important both from an absolute standpoint, and even more when weighing the potential for a larger injection during the summer 2023 injection season,” Curry said.
“Simple math shows that 1.7 plus 2.2 equals 3.9 Tcf, or 100 Bcf less than a level which historically creates material downside risk and steep contango,” Curry explained. “The potential for tracking toward a 4 Tcf end-of-October, or greater, is the rationale market bears are pinning their expectations to.”
For Mobius, weather is key for the balance of winter. If the current heatwave continues for another couple of weeks, the odds of testing 4 Tcf will significantly increase, according to the firm. Conversely, a shift back to a colder-than-normal balance of winter will put a wrench in market bears’ expectations, as this could push season ending inventory back below 1.5 Tcf.
“Since even the weather forecasters have a difficult time predicting the unpredictable, it will be an interesting ride for the balance of January,” Curry said.
On Friday, the longer-range weather models started to show signs that cold may finally return in early February. However, that did little to stop the bleeding in the gas market. After plunging 45.2 cents on Thursday, the February Nymex gas futures contract settled Friday at $3.710, off another penny. March slipped 3.4 cents to $3.392.
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