Natural gas futures fell on Monday for a fourth consecutive session, succumbing to shifts in fundamentals as production jumped to record levels and forecasts showed fading weather demand in the back half of October.
At A Glance:
- Benign conditions spread
- Production tops 103 Bcf/d
- NGI models 79 Bcf injection
Coming off a 10.8-cent drop on Friday – and a 3% decline last week overall -- the November Nymex gas futures contract on Monday settled at $3.109/MMBtu, down 12.7 cents day/day. December shed 10.5 cents to $3.479.
NGI’s Spot Gas National Avg. rebounded from a drop Friday and gained 20.5 cents to $2.065, bolstered in part by regional demand in the Northeast.
Wood Mackenzie estimates showed domestic production reaching 102.3 Bcf/d for Monday after jumping to a record level of 103.5 Bcf/d a day earlier. The past seven-day average was 102.6 Bcf/d, according to the firm’s estimates. Bloomberg’s estimate Monday put output at 102.9 Bcf/d.
On the weather-driven demand front, NatGasWeather said conditions early this week are expected to generate “near-seasonal demand.” A “cool shot lingering across the Great Lakes and Northeast” boosted regional heating demand to start the week, the firm said. However, overall gas consumption is likely to be held in check by “nice conditions over most of the southern U.S.”
Following another round of cooler weather for the Great Lakes and Northeast, “the data favors warm high pressure returning over much of the eastern half of the U.S. Oct. 24-30 for above normal temperatures and highs of mid-50s to 80s for light demand,” NatGasWeather added.
The domestic supply/demand trajectory Monday continued a trend that began to build last week, dampening bullish sentiment.
EBW Analytics Group’s Eli Rubin, senior analyst, said increased activity in the Permian Basin powered Lower 48 natural gas production to “fresh highs.” He noted a recent 0.5 Bcf/d Whistler Pipeline expansion. Whistler, a 450-mile, 42-inch intrastate pipeline that transports natural gas from the Waha hub in the Permian to Agua Dulce, TX, provides direct access to South Texas and export facilities on the Gulf Coast. The pipeline now has about 2.5 Bcf/d of mainline capacity.
Rubin also expects Appalachia production to ramp up into the winter, when Northeast heating demand tends to surge. “As Northeast demand rises seasonally and Appalachian output gains (current regional supply is more than 1.0 Bcf/d off realized record highs), continued supply records are possible and may offer further downside risk for natural gas later this year,” he said.
The market anticipates a seasonally average storage injection with this Thursday’s government print, covering the week ended Oct. 13. But should production remain elevated and demand light, inventory data could soon shift bearishly.
Early estimates submitted to Reuters for the week ending Oct. 13 ranged from injections of 56 Bcf to 100 Bcf, with an average increase of 81 Bcf. NGI modeled a 79 Bcf build. That compares with a five-year average of 85 Bcf.
The latest EIA print -- an injection of 84 Bcf for the week ended Oct. 6. -- roughly matched expectations and compared bullishly with a five-year average build of 93 Bcf. But the injection lifted inventories to 3,529 Bcf, keeping stocks well above the year-earlier level of 3,213 Bcf and the five-year average of 3,366 Bcf, according to EIA.
Compounding matters, as BMO Capital Markets analysts noted, an El Niño weather pattern formed this year. When that happens, it tends to usher in relatively mild winter temperatures and lower levels of snow in the Northern Plains, Midwest and Great Lakes – key gas consuming regions.
“Warmer-than-normal winter weather due to El Niño remains a risk that could translate to above-normal storage levels over the 2023/24 winter,” the BMO team said.
Global Demand Drivers
For all the traction gained by Lower 48 bears, international demand could prove a key offset.
LNG volumes totaled 14.0 Bcf/d for Monday, well above early fall averages around 12.0 Bcf/d. This increase followed the culmination of lengthy shoulder season maintenance projects at several liquefied natural gas facilities.
What’s more, union workers at Chevron Corp.’s Gorgon and Wheatstone LNG export plants affirmed Monday they expect to resume strikes later this week. Labor representative Offshore Alliance said workers were frustrated with negotiations for increased compensation and could walk off the job on Thursday. A protracted Australian strike would eat into global supplies and likely bolster demand for American exports.
While European prices leveled off Monday, they had rallied last week in part on the Australian news. Europe grew dependent on LNG after pipeline gas from Russia was largely cut off amid the Kremlin’s war in Ukraine.
Prices in Europe also rallied on Middle East supply uncertainties created by Hamas’ attack on Israel earlier this month. Israel has since declared war on the militant group and, in conjunction with this, ordered Chevron to shutter a key gas field in the region due to safety worries.
“War in Ukraine, war in the Middle East, strikes in Australia – these are all major wildcards that the market will have to watch closely,” veteran gas broker Steve Blair, now an independent analyst, told NGI.
Additionally, damage to a gas pipeline in the Baltic Sea this month added to worries, analysts at the International Energy Agency noted. Global natural gas markets are “in a fragile state,” they said Monday.
Cash Prices Jump
Spot gas prices posted strong gains – following declines last week – despite mostly mild weather and rebounding production.
NatGasWeather said a weather system “will linger” across the Great Lakes and East through Wednesday this week with highs of upper 40s to low 60s. Aside from 90s in the Southwest, most of the Lower 48 is expected to see near-average temperatures this week, leaving air conditioners and furnaces idled.
Next week, the firm added, “weak high pressure will rule” most of the country, with highs of 50s-60s in northern markets and 60s-80s across the South. “The cooler exception will be the Northern Plains with highs of 40s due to weak weather systems.”
With that foundation, prices in the East broadly advanced to support the national average. Algonquin Citygate near Boston jumped 45.0 cents from Friday to average $1.525, while Columbia Gas in Appalachia advanced 41.0 cents to $1.350.
Prices in California, while volatile this fall, remained elevated on Monday amid continued nervousness about ample supplies ahead of winter. The state endured an unusually frigid season last winter and utilities are stocking up this time around.
PG&E Citygate led all gainers on Monday, spiking $3.350 to $7.900.
Moving into the winter months, however, the El Niño conditions could leave demand wanting across vast swaths of the central United States, AccuWeather said in a report Monday. Across the Plains and Midwest and into the Great Lakes, the firm said there will be fewer cold waves and seasonal snowfall totals could be less than half of the totals from last winter.
"December should be mild overall across the Midwest and Great Lakes with just a couple of brief, chilly periods," AccuWeather meteorologist Paul Pastelok said. This could continue into January, though more blustery conditions are possible for February, he said.
However, even if late-season Arctic air finds its way into the central United States in February, overall energy demand in the region is likely to be near or below the historical average, AccuWeather said.
On Monday, Chicago Citygate gained 9.0 cents to $1.965, while Michigan Consolidated rose 6.0 cents to $1.875 – though both hovered below the national average.
