Natural gas futures gave up more ground Tuesday on a weakening heat outlook and concerns that diminishing cooling needs could keep power demand in check at a time when production shows signs of increasing and liquefied natural gas (LNG) exports remain soft.

Evening markets

The July Nymex contract fell 2.7 cents day/day, settling at $1.637/MMBtu. August lost 4.7 cents to $1.691. The July contract had rallied early on Monday but finished down a half-cent from Friday’s close after weather forecasts shifted cooler.

NGI’s Spot Gas National Avg. fell 6.0 cents to $1.560 on Tuesday.

While forecasts to start the week uniformly called for intensifying heat across most of the Lower 48 in late June and into early July, American models shifted cooler during trading Monday, and European models followed suit overnight and into Tuesday.

Tuesday’s forecast “has moved somewhat in the cooler direction, as models have moved toward a solution in which we see a cut-off low over the Southeast next week, acting to blunt the eastward progression of heat, keeping it confined from the Plains and Upper Midwest to New England as we move into early July,” Bespoke Weather Services said Tuesday.

“This is not unlike the predominant pattern we have seen this month, where we have seen a couple of these lows get trapped over the Southeast for a few days, limiting the extreme nature of the heat,” the firm added. However, Bespoke still expects gas-weighted degree days to average above normal this month and into July, with the balance of summer generally defined by strong heat. 

For near-term futures trading, however, “we need more heat back in the forecast.”

Rising temperatures would drive needed demand and help soak up an abundance of supply that has accumulated during the coronavirus pandemic. Commercial and industrial power needs were blunted during the spring, when economies shuttered to slow the spread of the disease. As states and countries allow businesses to reopen, power demand is increasing, though it has been gradual and choppy, and its sustainability remains precarious given a resurgence in virus cases, analysts have said.

At the same time, production levels have recently inched up. Lower 48 output climbed above 87 Bcf/d last week for the first time since mid-May, according to Genscape Inc. estimates. The trend continued over the weekend with the firm citing increases in associated gas as the likely driver, given recovering oil prices that have reportedly motivated some oil drillers to resume production. Genscape also noted recovering production from Tropical Storm Cristobal.

After plummeting in the spring, production is “slowly starting to climb back up since dropping under 85 Bcf/d on May 20, crossing the 87 Bcf/d mark on June 14 and hovering around there ever since,” Genscape said.

Rising demand, though, does not yet warrant greater production, according to analysts. In particular, LNG exports remain weak, given light demand from Asia and Europe amid the pandemic. Energy Aspects estimated that as of late last week, U.S. feed gas consumption totaled more than 5.0 Bcf/d below highs in late March.

“As U.S. gas fails to find a home abroad,” the firm said, “the backed-up feed gas will only swell domestic inventories” and may continue to pressure gas prices absent widespread and sustained heat waves in coming weeks.

The U.S. Energy Information Administration (EIA), in a report Tuesday that cited IHS Markit data, supported the Energy Aspects’ assessment. Daily natural gas deliveries to U.S. facilities that produce LNG for export hit a record 9.8 billion Bcf/d in late March, but deliveries fell to less than 4.0 Bcf/d earlier this month, EIA said.

“Historically low natural gas and LNG spot prices in Europe and Asia have affected the economic viability of U.S. LNG exports,” EIA said. “Trade press reports indicate that more than 70 cargoes were canceled for June and July deliveries, and more than 40 cargoes were canceled for August deliveries. In comparison, 74 cargoes were exported from the United States in January 2020.”

EBW Analytics Group said LNG feed gas demand has been steady over the past two weeks — “straying less than 0.25 Bcf/d from the 3.8 Bcf/d average” — but continued reports of canceled cargoes this week could change that quickly.

“There is a significant risk” that feed gas demand “will take another leg lower next week. If the news reports are accurate, “this could reduce spot market demand by 1.5-1.7 Bcf/d in July. While far from a foregone conclusion, it would not be surprising to see feed gas volumes fall another 1.0-1.5 Bcf/d on July 1.”

Sputtering Spot Prices

The lowered heat expectations hampered spot prices throughout the Lower 48 on Tuesday.

For the coming week, it is expected to remain regionally hot across the West, with highs in the 100s in much of the Southwest and California, according to NatGasWeather.

“Weather systems will continue across the Midwest and east-central U.S. this week, with showers and comfortable highs of 70s to low 80s. Around the periphery of these systems over the West, South and East Coast, temperatures will be very warm to hot,” the firm added. “Upper high pressure will gain ground to cover most of the U.S. this weekend with highs of mid-80s to 100s.”

However, it is “simply not as hot as the weather data once showed due to weather systems exposing flaws in the ridge” over Texas and the Northeast, the forecaster said.

Some of the steepest drops in cash prices were in California, where SoCal Citygate lost 15.0 cents day/day to average $1.970, and in the Northeast, where Algonquin Citygate dropped 17.0 cents to $1.670.

Elsewhere, Consumers Energy fell 10.0 cents to $1.580, and Texas Eastern M-3, Delivery declined 12.0 cents to $1.555.

Texas Eastern E. TX was a notable exception to the downward slide, climbing 14.5 cents to $1.385.