Natural gas forward prices recovered some ground during the Sept. 7-13 trading period as bullish technical signals and a steadily eroding storage surplus lifted the October contract by an average 10.0 cents, according to NGI’s Forward Look.
Small price gains were seen throughout the forward curves, with November prices averaging 9.0 cents higher and the full winter strip (November-March) picking up an average 10.0 cents, Forward Look data showed. Summer 2024 prices (April-October) were up less than a nickel at most U.S. locations.
Notably, price increases were small overall, given robust storage levels and expectations for a warmer-than-normal winter with forecasts for El Niño to remain in place through the season. Production also remains not far off highs despite some concern about the falling rig count and when impacts to output may materialize. In addition, LNG demand has been unstable in recent months, with maintenance and other issues causing significant fluctuations in feed gas deliveries to U.S. liquefied natural gas terminals.
Instead, the double-digit average price gain was largely driven by stout increases on the West Coast, where last year’s winter price volatility remained fresh on the minds of traders. After plunging last week, prices this week recovered at least half of what was lost.
The rebound is notable following a string of recent moves by California regulators aimed at limiting price volatility and ensuring reliability of the energy grid. Among them was the decision by the California Public Utilities Commission to increase the working capacity at the Aliso Canyon storage facility to the maximum level allowed following a 2015 leak. A couple of gas plants set for retirement also had their closures pushed back.
However, equal chances of above- or below-average temperatures playing out this winter in some parts of California leave the market at the mercy of Mother Nature, based on the latest outlook from the National Oceanic and Atmospheric Administration. The agency’s Climate Prediction Center showed Northern California temperatures leaning higher than normal, while the southern part of the state could see chillier weather.
The potential for cold weather in a region that relies heavily on imported power helped lift prices up sharply across California and neighboring regions. Planned operational restrictions on Southern California Gas’ Line 235 beginning next month also provided support to prices.
SoCal Citygate October forward prices jumped 30.0 cents from Sept. 7-13 to reach $5.116, the highest price in the country, according to Forward Look. The winter strip picked up a much larger 43.0 cents to average $7.808, while the summer 2024 strip tacked on 1.0 cent to $4.840.
In Northern California, PG&E Citygate October climbed 27.0 cents to $4.826, and the winter strip moved up 36.0 cents to $7.150. Summer 2024 prices averaged 5.0 cents higher at $4.820.
Forward prices also strengthened in nearby regions.
For example, the often-volatile Northwest Sumas – at the U.S.-Canada border and prone to volatility during periods of upstream gas flow restrictions – recorded the largest move at the front of the curve as the October contract shot up 50.0 cents to $3.555, according to Forward Look. Winter prices averaged 60.0 cents higher at $8.694, while the summer 2024 averaged 13.0 cents higher at $3.350.
Bearish Headwinds
The hefty price increases out West compared with only modest gains elsewhere across the country. Benchmark Henry Hub October rose 10.0 cents through the period to $2.677, boosted by lingering heat in the southern states and rising LNG feed gas deliveries.
Notably, after falling to a trickle on Sept. 9, gas volumes flowing to Freeport LNG have started to recover. Nominated feed gas on the Gulf South Pipeline system, the export facility’s primary supply route, was 599 MMcf/d on Wednesday, according to NGI analysis of pipeline data from Wood Mackenzie. Though Freeport has not commented on its operations amid the decline, utilization of pipeline capacity jumped to 33% from 11% the previous day. Flows to the LNG terminal averaged 1.38 Bcf/d from Sept. 1-8.
Meanwhile, NatGasWeather said even though regions around most of North and Central Texas have cooled into the 70s and 80s, long-range weather maps maintain a warmer-than-normal pattern in early October. The forecaster expects cooling degree days to continue tracking higher than normal.
That said, with highs topping out in the 90s instead of 100s, the strong pull on natural gas to meet power loads in the South Central region already has eased off record highs. This was evident in the latest government gas inventory report, which showed the string of storage withdrawals coming to an end.
The Energy Information Administration (EIA) said stocks for the week ending Sept. 8 increased by 57 Bcf, on the high end of expectations but well below historical levels. The build lifted inventories to 3,205 Bcf, which is 445 Bcf higher than last year at this time and 203 Bcf above the five-year average.
Regionally, the South Central posted a net 6 Bcf increase in stocks, with salts remaining flat week/week and nonsalts accounting for the rise, according to EIA. Most other regions also posted modest single-digit increases. The Midwest, meanwhile, saw stocks rise by 27 Bcf.
With the oppressive heat in the rearview mirror and storage activity stabilizing, Houston Ship Channel October prices slipped 5.0 cents from Sept. 7-13 to reach $2.242, according to Forward Look. The winter strip shed 1.0 cent to $3.356, while summer 2024 prices stayed flat at an average $2.930.
Looking ahead, EBW Analytics Group pointed out that retreating weather-driven demand, Freeport LNG’s outage (albeit likely temporary given the recent recovery in feed gas) and continued injections out West to reduce risks of another basis blowout in the coming winter may prevent the storage surplus versus the five-year average from contracting much further. This may open the door for natural gas to retest recent lows into the latter half of September.
Longer term, there is moderate support for the autumn shoulder season. The natural gas market has been “exquisitely sensitive” to perceived drops in production for most of the 2023 injection season, including as recently as Tuesday’s session, according to EBW. Short-lived declines remain possible during the 30 to 45 day window.
Extended pipeline maintenance could limit natural gas supplies able to reach Henry Hub, while Appalachian producers may face sufficient economic incentives to shift supply from October into November and drive appearances of a drop in October production.
“If supply appears to be declining into the beginning of the heating season, Nymex winter risk premiums could turn higher seasonally – even if gains ultimately prove fleeting,” EBW senior energy analyst Eli Rubin said.
After all, any extended warmth in October could postpone a sustained move higher for prices, according to Rubin. He noted that early-season cold can often stir “bullish animal spirits” as the injection season can arrive at a premature end. Absent any chill, prices for the winter months may struggle to sustain their contango. Case in point: The January 2024 premium to October 2023 is down 31 cents over the past month.
“The downshift in the winter contract premiums – even as the most-likely scenario for the end-of-October storage target continues to falter below 3,800 Bcf – may point to storage operators selling forwards in an attempt to lock-in arbitrage profits,” Rubin said. “Physical gas demand for injections may rise over the next 30-45 days, but natural gas may continue to face headwinds reaching the current $3.60 average price for December-February absent sustained cold winter weather.”
