Natural gas futures on Wednesday picked up where they left off the prior session – mired in the red as traders braced for autumn weather and lighter demand.
At A Glance:
- Prompt month sheds 7.2 cents
- Northeast production slips
- Market sees 40s Bcf injection
Following an 18.3-cent drop a day earlier, the October Nymex gas futures contract shed another 7.2 cents on Wednesday and settled at $2.510/MMBtu. November fell 4.8 cents day/day to $2.943.
NGI’s Spot Gas National Avg. ticked up for a second day this week, advancing 4.5 cents to $2.370, with gains in California and West Texas offsetting declines elsewhere.
Production on Wednesday was down about 1 Bcf/d to 101 Bcf/d because of maintenance work in the Northeast, according to Wood Mackenzie. However, upward revisions were expected and output overall remains strong and near record levels, slightly above 102 Bcf/d.
Demand, meanwhile, also was robust on Wednesday by early September standards, with late-summer heat lingering in the South and parts of both the East and West. Forecasts, though, called for milder conditions later this month, grabbing the futures market’s attention and sparking fresh concerns about supply/demand imbalance as the shoulder season nears.
Natural gas prices continue to “languish” because “we continue to see the market as adequately supplied, especially given the likelihood of an El Niño winter,” BMO Capital Markets analyst Randy Ollenberger said. He referred to long-range forecasts that are calling for El Niño conditions, which historically have resulted in relatively mild winter temperatures and soft heating demand.
Given the expectations for tapering demand as well as falling gas-directed rig counts over the past few months, traders have watched closely for signs of declining production.
U.S. Global Investors Inc.’s Mike Matousek, head trader, told NGI that, while output is likely to moderate this fall in the face of low prices, it is not likely to drop dramatically. This is in part because of expectations for a jump in LNG demand next year – when new liquefied natural gas facilities are slated to open on the Gulf Coast.
However, Matousek also noted that oil producers in the Permian Basin are bound to remain active to meet global demand at a time when OPEC and its allies have committed to output cuts through the end of the year. Strong crude production in the Permian tends to result in elevated levels of associated gas output.
“The global crude situation has implications across the energy spectrum,” Matousek said, including gas production.
Rystad Energy’s Jorge Leon, senior vice president, agreed. He noted that Saudi Arabia, which leads OPEC, announced this month that it would extend an existing 1 million b/d of voluntary cuts until at least December. Saudi ally Russia also said it would prolong cuts of 300,000 b/d until the end of the year. Crude prices climbed in response.
“These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide,” Leon said. American oil producers, which have kept output near pandemic-era highs this year, are bound to remain active as a result, he said, and in doing so, maintain steady associated gas volumes.
Storage Scenario
Supplies in underground storage, at a surplus to the five-year average through most of the year, have come closer in line with historic norms over the past two months. Scorching weather across much of the Lower 48 in recent weeks resulted in lighter injections of gas into underground inventories.
That is expected to continue with this week’s Energy Information Administration (EIA) storage report, covering the week ended Sept. 1. The trend may not last if heat quickly fades, though, as current weather outlooks predict, and production holds strong.
For Thursday’s EIA report, NGI modeled a 43 Bcf increase. That compares with an increase of 55 Bcf a year earlier and a five-year average build of 60 Bcf.
Injection estimates submitted to Reuters spanned 33 Bcf to 65 Bcf, with a median of 42 Bcf. A Bloomberg poll found a narrower range but also a median expectation for a 42 Bcf increase. The Wall Street Journal’s survey landed at an average of 42 Bcf.
For the Aug. 25 period, EIA reported an injection of 32 Bcf. That increase lifted inventories to 3,115 Bcf and kept stocks above the year-earlier level of 2,631 Bcf and the five-year average of 2,866 Bcf. However, the surplus to the five-year average – 249 Bcf – dropped below the 250 Bcf level for the first time in six months.
Based on recent and upcoming weather patterns, the next two to three storage reports could reveal smaller-than-average weekly injections, NatGasWeather said.
“However, after cooler trends for mid- and late September, larger builds will be lining up thereafter, a few of which could approach 100 Bcf without hotter trends,” the firm added.
Analysts at The Schork Report noted that early hints of a cold winter could be a price catalyst this fall.
“We tend to see the highest gas prices several months in advance of the cold weather,” they said. “This is because uncertainty builds rapidly regarding the market’s ability to offset imminent furnace demand.”
Still, with fall weather approaching and El Niño conditions looming later in the year, futures market bulls have little to seize upon at the moment.
Physical Prices
Next-day cash prices varied by region amid evolving weather patterns.
In the near term, NatGasWeather said the southern and eastern United States were expected to see “very warm to hot” temperatures, with highs from the upper 80s to 100s “as high pressure rules” this week. Summer weather continued in the Southwest and California deserts, too.
Meanwhile, much of the Midwest and Great Lakes “will be comfortable with highs of 70s and 80s as weak weather systems track through.”
While prices in those regions dipped lower Wednesday, California and West Texas price increases proved ample enough counters to support the national average.
SoCal Citygate gained 49.0 cents day/day to average $3.075, and SoCal Border Avg. advanced 28.5 cents to $2.615.
In West Texas, Waha rose 16.5 cents to $1.960, while El Paso Permian gained 13.5 cents to $1.945.
Farther out, the northern half of the United States “will be near perfect” with highs of upper 60s to 80s next week, “while the southern U.S cools into the 80s and 90s as upper high pressure weakens.” This will dampen national cooling demand and likely weigh on prices, the firm said.
NatGasWeather expects more of the same in the second half of the month.
“There’s still very strong national demand the next several days,” but “the pattern for Sept. 13-20 isn’t as hot as needed to impress,” the firm said.
In Houston, among the most excessive heat-plagued markets in the country this summer, relief may soon arrive. This could weigh down prices in Texas but ease pressure on storage supplies there. The South Central has been the lone region to report multiple storage withdrawals in recent weeks.
Meteorologist Eric Berger of Space City Weather said the Lone Star State’s largest city would continue to see triple-digit highs through the current trading week. “But by this weekend, high pressure starts to weaken. Accordingly, next week, our temperatures are going down into the mid-90s, at least, and we’ll start to see some better rain chances,” he said. “So all in all, quite a bit of moderation from the summer of hell conditions we experienced for most of June, July and August.”
Houston Ship Channel on Wednesday fell 7.0 cents to $2.325.
