Natural gas futures failed to gain traction Friday, continuing a lengthy losing streak amid elevated production volumes and strong supplies in storage.
At A Glance:
- Stout supplies apply pressure
- Output holds above 102 Bcf/d
- Varied domestic demand view
The November Nymex gas futures contract lost 5.8 cents day/day and settled at $2.899/MMBtu. It marked an eighth consecutive decline.
NGI’s Spot Gas National Avg. dropped 30.0 cents to $1.990, falling a second straight day as near-term weather demand dwindled.
Production held above 102 Bcf/d on Friday – as it did all week – and hovered about 1 Bcf/d within record levels. At the same time, weather-driven demand at the national level has proven modest. There have been bouts of chilly air and rain across the North, from the Rockies to the Northeast, but overall this month conditions have been mild throughout the South.
“A bump in national demand is expected Oct. 29-Nov. 1 as a weather system tracks across the northern U.S.,” NatGasWeather said. Longer-range forecasts, however, continued to show near- or above-normal temperatures over most of the country into the first week of November.
The robust output and benign southern weather were evident in the latest government inventory data that was posted Thursday, hurting futures prices, according to analysts at The Schork Report.
“Natty bears have reestablished a dominant presence thanks to robust dry gas production that remains situated well over 100 Bcf/d and a dearth of weather demand,” the Schork analysts said.
The U.S. Energy Information Administration (EIA) reported an injection of 97 Bcf into storage for the week ended Oct 13. The increase was driven by a surge in South Central supplies -- the 40 Bcf build there led all regions -- and far surpassed expectations for a build around 80 Bcf and the five-year average of 85 Bcf.
It increased inventories to 3,626 Bcf, keeping stocks well above the year-earlier level of 3,326 Bcf and the five-year average of 3,451 Bcf.
“The EIA served up a whopper,” the Schork analysts said, noting the print kept heavy pressure on futures.
EBW Analytics Group’s Eli Rubin said the “massive” 40 Bcf injection in the South Central “was 12 Bcf larger than any regional storage build in the past 11 months.” It was only the second storage build in the region since Memorial Day.
“Regional weather is softening from blazing summer heat,” Rubin said, while strong production, including in the Permian Basin of Texas, should further bolster regional supply availability. “While consuming regions may continue to pare injections as storage coffers fill, further elevated storage builds are possible in the South Central,” he said.
Looking ahead to the next EIA inventory for the week ended Oct. 20, analysts are looking for another bearish print. Preliminary estimates submitted to Reuters ranged from injections of 59 Bcf to 86 Bcf, with an average increase of 73 Bcf. That compares with an injection of 61 Bcf a year earlier and a five-year average of 66 Bcf.
Production Prowess
Estimates from Tudor, Pickering, Holt & Co. (TPH) on Friday showed production over the past week averaging 102.8 Bcf/d, up 1 Bcf/d week/week.
TPH analyst Matt Portillo cited higher volumes out of the Permian, up around 0.8 Bcf/d, and an increase of 0.4 Bcf/d week/week for Marcellus Shale output.
“On the demand side, Mexican imports started to trend lower as weather factors are minimized and are no longer breaching the 7 Bcf/d mark,” he said, estimating that U.S. exports to its southern neighbor averaged 6.3 Bcf/d over the past week.
Portillo said this helped to offset total LNG feed gas demand that increased about 1 Bcf/d to a 14.3 Bcf/d average over the week. The increase was aided by the Cove Point liquefied natural gas plant in Maryland coming back online, adding 0.8 Bcf/d in demand volumes, after a lengthy maintenance event.
For the next EIA report, Portillo modeled a 77 Bcf build.
Looking ahead, Portillo added that he is “cautious on fundamentals,” given the production strength and early forecasts for a relatively mild winter.
“Ultimately, without a cold winter, our end-of-withdrawal balance sits at very comfortable levels,” he said, meaning supplies could emerge next spring in bearish condition.
Soft Spot Markets
Cash prices cratered across the Lower 48 on Friday as demand dissipated.
NatGasWeather said it expects a minor but short-lived increase in demand to begin the next trading week as chilly air “sweeps across the Great Lakes and Northeast with lows of 30s and 40s” on Monday and Tuesday.
“However, warm high pressure is favored to build” over the eastern half of the country later in the week, ushering in above-normal highs of 60s to 80s “for light national demand,” the firm added. Comfortable conditions were in the cards for most other regions.
Against that backdrop, Houston Ship Channel dropped 58.5 cents day/day to average $1.865, while Chicago Citygate lost 38.0 cents to $1.855, and Northwest Sumas fell 27.5 cents to $1.715.
On the pipeline front, meanwhile, traders are likely to sharpen their focus on Kinder Morgan's (KMI) Permian Highway Pipeline (PHP) maintenance project planned for the coming week. It would curtail takeaway capacity from the Permian to 1.73 Bcf/d – from 2.1 Bcf/d – for several days.
“Previous pipeline outages have caused price volatility at the Waha hub given egress constraints in the basin, including negative pricing events this year in May and July,” East Daley Analytics noted. Such work has had the opposite impact on West Coast prices because Southern California needs Permian gas to meet demand. When PHP is limited and western flows are limited, SoCal Citygate tends to spike.
With weather-driven demand absent on Friday, however, SoCal Citygate plunged $3.735 to $7.630. Waha in West Texas dropped 70.0 cents to $1.290.
The good news for utilities and price-sensitive consumers, though, is that the California Public Utilities Commission recently voted to allow Southern California Gas Co. to raise the maximum working capacity of the Aliso Canyon storage field by 27.6 Bcf to 68.6 Bcf, the East Daley analysts noted.
“Heading into winter, the additional storage capacity could help cushion the West Coast from major price swings during bouts of cold weather,” the East Daley team said.
