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What Gains? Natural Gas Futures Traders Slam Brakes on Rally as Cash Stabilizes
Natural gas futures faltered midweek, erasing the prior two days’ gains as traders looked ahead to growing storage surpluses later this month amid ongoing warmth across most of the country. The March Nymex gas futures contract settled Wednesday at $2.396/MMBtu, down 18.0 cents on the day. April futures slid 18.7 cents to $2.477.
At A Glance:
- Production fully recovered
- Storage surplus seen swelling
- Cash prices mostly steady
Spot gas prices, meanwhile, were mixed as rain and cooler air dropped into the central United States. NGI’s Spot Gas National Avg. edged up 9.5 cents to $2.755.
Another bout of chilly weather may be around the corner for the Midwest and East Coast, but the coming cold snap is expected to be fleeting.
NatGasWeather said milder weather would quickly return by next week, with “pleasant” highs in the 50s to 80s leading to “very light” demand at the national level. There is some chillier weather in the forecast for the Feb. 17-19 period, but at least some of the data is showing a quick return to warmth by Feb. 20.
“Essentially, like in every instance this winter, cold isn’t forecast to last more than several days before warmer temperatures immediately follow,” NatGasWeather said.
If the devil is in the details, it’s the trend of a quick warmup following any cold blasts that has resulted in plentiful storage stocks and some of the lowest natural gas prices seen in years. What’s more, after Thursday’s round of government inventory data, stocks could improve further amid the mostly warm February outlook.
Estimates ahead of the Energy Information Administration’s (EIA) weekly inventory report were wide ranging, spanning from a draw of 187 Bcf to as steep as 212 Bcf. The high-end 212 Bcf pull was the call from NGI for the reference period ending Feb. 3.
A Reuters poll of 13 analysts produced a median decrease of 194 Bcf, while a Bloomberg survey of six analysts resulted in a median draw of 201 Bcf. The Wall Street Journal’s poll of 14 analysts averaged a 199 Bcf withdrawal.
For comparison, 228 Bcf was pulled out of storage during the similar week last year, according to EIA. The five-year average draw is 171 Bcf.
As of Jan. 27, total working gas in storage stood at 2,583 Bcf, which is 222 Bcf above year-earlier levels and 163 Bcf above the five-year average, according to EIA.
With the balmy outlook in place and production fully recovered from Winter Storm Mara’s impacts, EBW Analytics Group LLC expects a near-doubling of storage surpluses by month’s end. This suggests any upside momentum along the Nymex futures curve may soon falter.
That said, EBW said the natural gas outlook may find more enduring support this spring, which goes against the traditional slide that accompanies the shoulder season. As long as spring weather is not unusually mild, rising feed gas deliveries to Freeport LNG and coal-to-gas switching could provide a boost to prices. At the same time, production could continue to run into constraints, limiting any incremental rise in supply. Furthermore, EBW said the market – with sub-$3 prices seen through June – “appears to be pricing in ultra-bearish scenarios that are unlikely to materialize.”
On the supply side, pipeline constraints continue to pose a risk, particularly in the Permian Basin, and there’s also the possibility that producers may be slow to respond to current price signals.
“Rigs, fracture crews, labor, equipment and other oilfield services contracts are already locked-in and difficult to maneuver on short notice,” EBW’s Eli Rubin, senior energy analyst, said.
Rubin pointed out that the January 2024 Nymex contract is currently trading $1.50 higher than the May contract, offering a potential paper return of 53%. “Notably, the May 2023-January 2024 spread is more than double the same spread during spring 2020 when the entire U.S. economy was locked down,” he said.
Cash A Mixed Bag
Spot gas prices barely budged across much of the Lower 48 on Wednesday, with moderate weather doing little to spark gas demand.
The National Weather Service said a low pressure system was causing severe weather in the middle of the country, with a trailing cold front set to drop temperatures a few notches. However, with highs still expected to reach the 50s and 60s, heating loads were likely to be minimal.
Chicago Citygate cash picked up 6.0 cents to reach $2.435, while Northern Natural Demarc tacked on 4.5 cents to reach $2.450.
Down in Texas, Houston Ship Channel cash jumped 12.5 cents to $1.995, and El Paso Permian climbed 22.0 cents to $1.885.
Gains and losses were modest throughout Louisiana and the Southeast, while more significant price weakness spread from Appalachia to the Northeast.
For example, Tennessee Zn 4 Marcellus next-day gas fell 22.5 cents day/day to average $1.950. Farther downstream, Algonquin Citygate tumbled 34.0 cents to $2.520.
These prices are a far cry from the record highs reached only last week, when temperatures plummeted 10 degrees below zero in Boston and lifted regional prices above $200 in some locations.
During the brief winter blast, ISO-New England (ISO-NE), the power grid operator for the region, had to use every tool in its shed to meet heightened electricity demand, according to EIA. Though power loads fell well short of any records, ISO-NE called on more than 5,000 MW of oil-fired power plants – as well as the region’s last remaining utility-owned coal-fired power plant, the Merrimack Station in New Hampshire, EIA said.
“These plants ran during the entire cold weather event,” according to EIA researchers.
Generation at these plants was phased out on Sunday (Feb. 5) once temperatures warmed.
The mix of electricity sources used to meet electricity demand over the weekend was similar to the mix used during Winter Storm Elliott in December, according to EIA. In both cases, oil-fired power plants met the heightened electricity demand and compensated for the decline in output from natural gas-fired plants.
“Output from natural gas-fired plants declined because the region’s limited natural gas pipeline capacity was increasingly used to supply natural gas to residential and commercial heating customers, making less natural gas available for power plants,” EIA said.
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