Natural gas futures shot above $3 in early trading Monday before falling back to earth as record hot forecasts for June got outweighed by concerns that the production spigot could soon be widening again.
At A Glance:
- July Nymex down 1.2 cents
- Output at 99.4 Bcf/d
- NGI models 78 Bcf injection
The July Nymex contract fell by 1.2 cents day/day to settle at $2.906/MMBtu. The prompt month contract traded as high as $3.096 before it sold off midday to as low as $2.86. Monday was the first time the prompt month has traded above $3 since mid-January.
NGI’s Spot Gas National Avg. climbed 30.5 cents on Monday to $1.890.
National production was around 99.4 Bcf/d on Monday, down from levels above 100 Bcf/d over the weekend, according to Wood Mackenzie’s estimates.
Lower 48 gas supply has “continued to underwhelm” for June at an average 99.4 Bcf/d versus an expected 101 Bcf/d, according to Tudor, Pickering, Holt & Co. (TPH) analyst Matt Portillo. “With higher cash prices and stronger demand, we are expecting curtailments to end during June,” he said. TPH may tighten its supply model if production does not bounce higher in the next few weeks, Portillo added.
Futures turned sharply lower before midday after Mountain Valley Pipeline LLC (MVP) informed FERC that the pipeline project was mechanically complete and final pipeline segments were being purged and packed with natural gas. MVP asked the Federal Energy Regulatory Commission for authorization by Tuesday (June 11) to put the pipeline into service.
“Selling the past two hours might have been aided by reports of the MVP pipeline filing a FERC notice for initiating gas on the pipeline soon,” NatGasWeather said in a midday update. The firm added that profit taking could also be a reason after strong gains since last week.
The market has wrestled with the timing of some natural gas producers reversing winter output curtailments over the past few weeks. The forward curve sold off in late May on signs that EQT Corp. was bringing back some output.
The MVP pipeline news was “not a bad theory” behind the sell-off in futures, Criterion Research’s James Bevan, vice president of Research, said on online energy platform Enelyst. However, he pointed out that MVP was receiving limited flows with only 50 MMcf/d via the Equitrans Midstream Corp. meter over the past three days, less than test flows in recent weeks.
“I don't necessarily see” the MVP start-up “as really tipping the physical balance in the market to a significant degree,” Evans on Energy senior analyst Tim Evans told NGI. “So to the extent that we sold off on that news, it may have been the futures market exaggerating what's going on in the real world.”
Market fundamentals are constructive for natural gas with summer demand increasing and storage levels set to decline further, Evans said. However, natural gas at $3 was double from where prompt futures were trading in March, he said. “So it’s harder to argue that the market is clearly cheap here,” he said.
Instead, Evans said the market’s fundamental strength was enough to test the upside, with perhaps another 25-30 cents higher near term, but also with 35-30 cents of downside risk remaining.
“It's not clear that you can just chase the price higher,” Evans said. “At some point, the economics shift enough that we may bring some production back online. That’s also going to limit the upside.”
NGI data showed U.S. liquefied natural gas feed gas flows at about 12.8 Bcf/d on Monday, versus levels above 13 Bcf/d over the weekend.
Hotter Forecasts
Weekend updates to weather models continued to advertise “quite hot” conditions for the second half of June, NatGasWeather said. The American model shed 7 cooling degree days (CDD) while the European model added 4 CCDs, the firm said.
Between the two models, the European model is “given favorability in the pattern details given its higher skill versus other models, but all projections agree that this will be a hotter than normal period in most locations,” according to Maxar’s Weather Desk. Even with the difference, both models showed June would be hot. The European model showed June tracking to be the hottest on record. The American model has it ranked in the top 10 back to 1950, Maxar meteorologist Brad Harvey said on Enelyst.
“With this hot pattern expected to persist, June is on a record hot pace” for population-weighted cooling degree days (PWCDD), Harvey said.
Surplus Drawdown
The U.S. Energy Information Administration (EIA) on Thursday reported an injection of 98 Bcf into storage for the week ended May 31. The print landed outside the top range of estimates but came in below historical averages.
The lag to the build pace of previous years reduced the surplus of gas by six percentage points since mid-May to 25% above the five-year average, or 521 Bcf, by the end of the week ended May 31.
Looking ahead to this Thursday’s EIA assessment, estimates for the week ended June 7 point to again falling behind the pace of year-ago and historical builds.
Early views submitted to Reuters ranged from injections of 61 Bcf to 90 Bcf, with an average increase of 75 Bcf. NGI modeled a build of 78 Bcf. These estimates compare with a five-year average injection of 89 Bcf and year-ago increase of 90 Bcf.
Physical Prices
Spot natural gas prices gained ground Monday for next-day flows across all regions of the Lower 48, while prices in Canada fell modestly.
Prices in Texas led the way higher. Permian Basin benchmark Waha jumped 73.5 cents day/day to average $1.075. In East Texas, Katy moved up 49.0 cents to $2.420.
Elsewhere, Joliet in the Midwest added 33.5 cents to $1.795. Tenn Zone 1 100L in the Southeast rose 37.5 cents to $1.855.
Much of the United States was forecast to see moderate to light demand during the first half of the week as high pressure systems promoted below and much below average temperatures in the Midwest and marginally below average temperatures in the East, according to Maxar.
Later this week, as the highs move offshore, the heat was expected to build quickly in the South and East, with highs rising into the low- to mid-90s in the Mid-Atlantic and upper 90s in the Southeast, Harvey said. There is a chance that highs in Atlanta could top out at 100 degrees late in the week, he said.
“Plenty of heat is in store in the coming days, first in the West before expanding into the South and East at the end of this week and then much of the United States next week,” Harvey said. With mid-week highs forecast in the mid-90s for Denver and Salt Lake City and near 110 degrees for Phoenix, EIA’s Mountain West region could see record PWCDD demand on Thursday, he added.
Vector Pipeline LP has planned maintenance in Zone 2 in Michigan Tuesday from the Athen compressor station to Milford Junction. Seven interconnects were to be shut in during the outage. As a result, Rover Pipeline LLC was expected to halt about 1 Bcf/d to Vector via Milford, based on 30-day flow data from Wood Mackenzie.
There is a possible reroute on Rover to the Panhandle Eastern Pipe Line Co., but the interconnect has been hitting its maximum operational capacity recently, Wood Mackenzie analyst Nadeed Ahmed said.
Ahead of the supply cut Tuesday, Michigan Consolidated rose 21.0 cents to $1.635, comparable to gains by other Midwest hubs in trading Monday.
In Canada, NOVA/AECO C fell a Canadian penny to C81.5 cents/GJ.
