Rising Lower 48 natural gas production, led by a rebound in the East, has undermined price support from sizzling summer heat setting in.
Intense heat baking the Midwest and Northeast was forecast to sweep across the South and the midsection of the country into next week, putting cooling degree days for the back half of June on pace to be “the hottest of the past 45 years,” NatGasWeather said.
Yet for all of that demand, a rally in gas futures stalled last week, even as forecasts kept up expectations for the heat to carry over into July. Through Thursday (June 20), the July New York Mercantile Exchange (Nymex) contract fell about 40 cents, or 12%, since it pushed above $3.000/MMBtu on June 11. The contract had dropped another 3.9 cents before midday Friday.
Natural gas traders gave “the cold shoulder to the heat dome terrorizing much of the United States,” said Mizuho Securities USA LLC’s Robert Yawger, director for Energy Futures.
Analysts pointed to several factors for the weakness, including production.
NatGasWeather said selling factors included weather models shaving off some demand, stronger production and stout inventory levels. “It's going to take time for surpluses to dwindle down to more reasonable levels and that could be the reason for strong selling the past five out of six sessions,” the firm said Thursday.
The Lower 48’s surplus of natural gas stood at 561 Bcf, or 22%, to the five-year average after utilities injected 71 Bcf into storage for the week ended June 14, the U.S. Energy Information Administration said Thursday.
The July Nymex contract has moved inversely to daily production estimates, especially in the Marcellus Shale where EQT Corp. is reversing curtailments put in place in late winter.
Nymex July futures gained support early in the month as May’s initial burst of supply faded. The contract catapulted 22.3 cents above the $3.000 level on June 11, the same day that Appalachian Basin output bottomed out near 33 Bcf/d, Bloomberg data show. Appalachian output proceeded to march up to a five-month high of 34.26 Bcf/d by Monday (June 17), coinciding with an 11% pullback in July futures.
Total Lower 48 production averaged 101.2 Bcf/d in the seven days to Friday, up from an average of 99.4 Bcf/d two weeks ago, according to Wood Mackenzie. Rystad Energy analysts estimated that production would climb to 102.8 Bcf/d in July and be “net bearish for prompt Henry Hub prices despite the recent warm weather.”
Echoing that view, EBW Analytics Group’s Eli Rubin said higher Appalachian gas production was one of the more bearish developments coming into the week of June 16. The firm anticipated a majority of U.S. production curtailments returning by mid- to late-July, but an earlier return would “soften the bullish impacts from scorching near-term record Eastern heat,” Rubin said.
MVP Boost
Gas futures have also reacted negatively to the approaching startup of Mountain Valley Pipeline LLC (MVP). The pipeline officially began operations on June 14.
Criterion Research Inc.’s James Bevan, vice president of Research, said MVP “may be one driver allowing Appalachian gas production to push to the high end of its May/June range.”
However, in contrast to the weakness in futures, physical prices have held firm alongside the additional supply in the East.
NGI’s Spot Gas National Avg. rose above $2 last week for the first time since February. The average held that level this week, partly on the back of strength in the East. NGI’s Appalachia Regional Avg. climbed above $2 Monday, a threshold it never attained last summer, NGI's Daily Historical Data show. Meanwhile, the Northeast Regional Avg. ahead of its heat wave more than doubled to $3.495 over June 1-19.
MVP is not expected to run anywhere near its 2 Bcf/d capacity until bottlenecks are cleared on the Transcontinental Gas Pipe Line Co. LLC (Transco) system. MVP has two receipts and six delivery points. Flows to Transco run through the Cherrystone interconnect.
Initial gas volumes on MVP ranged between 260-410 MMcf/d, according to data on MVP’s electric bulletin board (EBB). The pipeline was set to top 500 MMcf/d on Friday, boosted by the first receipts from the 1.6 Bcf/d Hammerhead gathering system. Much of that gas was scheduled to flow onto Transco via the Cherrystone interconnect, MVP EBB data showed.
“That entire 1.6 Bcf/d isn't likely to be fully utilized for several quarters because of pipeline constraints south of Station 165 on Transco,” said NGI’s Pat Rau, senior vice president of Research & Analysis. “There could be some days when MVP flows top 1 Bcf/d here in 2024, but volumes like that aren't likely to be the norm this year.”
Criterion estimated that MVP could add an incremental 200-300 MMBtu/d to Transco flows in the summer. East Daley Analytics forecast MVP flows to average 750 MMcf/d for the remainder of this year, which would include post-summer flows, when more capacity is free.
Transco’s Southeast Supply Enhancement expansion is expected to increase its capacity south of Station 165 by late 2027.
