Natural gas futures forged ahead for the first time in five sessions on Tuesday as traders shifted their focus from stout supplies to a surge in heat that canvassed large swaths of the Lower 48 and galvanized air conditioning use.
At A Glance:
- Extreme heat spreads to the East
- Production slips below 99 Bcf/d
- Light storage injection expected
The July Nymex gas futures contract rose 12.1 cents day/day and settled at $2.909/MMBtu.
Coming off a 13.5-cent gain to start the week, NGI’s Spot Gas National Avg. added another 1.5 cents on Tuesday to $2.135.
Production on Tuesday slipped just below 99 Bcf/d, according to Wood Mackenzie’s updated estimates. That was down more than 2 Bcf/d from the prior seven-day average and more than 1 Bcf/d from the 30-day average.
Natural gas producers had begun to boost output in June after a spring pullback and the completion of the Mountain Valley Pipeline LLC (MVP) project, which bolstered delivery capacity in the East.
However, while MVP “should stimulate new gas demand and midstream infrastructure in underserved areas of the Mid-Atlantic region” over time, it is likely to have “only modest near-term impacts,” analysts at East Daley Analytics said. MVP stretches 303 miles from West Virginia to an interconnect with Williams’ Transcontinental Gas Pipe Line Co. LLC (Transco) in Virginia.
East Daley expects MVP to flow 750 MMcf/d on average the remainder of this year. That is “well below capacity of 2 Bcf/d due to downstream constraints at Transco Zone 5. These constraints will limit flows until 2027, when Transco de-bottlenecks downstream through its Southeast Supply Enhancement expansion.”
What’s more, the latest production readings reminded traders that maintenance work, including a project that started Tuesday in New England, can sporadically curb summer gas flows and raise supply/demand concerns enough to impact prices.
National Weather Service (NWS) data, meanwhile, showed lofty temperatures settled in from the Southwest through Chicago and up to the Mid-Atlantic and Northeast. Highs in the upper 80s and 90s were widespread and projected to endure through the week in major markets from the Windy City to New York City to Boston. This was expected to more than offset the impacts of a tropical system in the Gulf of Mexico that was on target to deliver cooling rains to Texas by midweek.
Gelber & Associates analysts also noted that long-term NWS data “indicate above-average temperatures for the next three months.”
Paragon Global Markets LLC’s Steve Blair, managing director of institutional energy sales, told NGI the four-day slump that stretched from late last week through Monday was “a bit strange” given “the way summer weather is heating up.” Following Tuesday’s action, he added, it appears any price slumps ahead could prove “temporary phenomenons for the next few months.”
EBW Analytics Group’s Eli Rubin, senior analyst, agreed the market was likely to seize upon the heat theme for much of the summer.
“Chances for significantly hotter-than-normal weather during July and August could raise natural gas demand and drive prices higher,” Rubin said. “Further, it is likely that the combination of shrinking storage surpluses and scorching record heat could lead prices to exceed long-term fundamentals over the next 30-45 days before subsiding in the fall. As we have noted, medium-term bullish upside is likely, but it is increasingly dependent on blistering weather forecasts coming to fruition.”
For the rest of June and to start July, Rubin noted that DTN’s 15-day forecast on Tuesday called for 57 cooling degree days (CDD) above 30-year averages. “Every single day of the 1-15 day forecast is above peak summer CDD averages — underscoring the extent of the heat wave,” he said.
For the U.S. Energy Information Administration (EIA) storage print covering the week ended June 14, NGI modeled an increase of 69 Bcf. Preliminary injection estimates submitted to Reuters for the week spanned 56 Bcf to 91 Bcf, with an average increase of 69 Bcf. If realized, that would compare bullishly with a five-year average increase of 83 Bcf.
For the first week of June, EIA reported an injection of 74 Bcf. That was lower than the five-year average of 83 Bcf. Inventories finished the week 24% above the average of the prior five years, but the surplus dwindled from around 40% in March.
Physical Market
Following big gains to start the week, cash prices for delivery Wednesday and Thursday – in observance of the Juneteenth holiday – rallied a second day this week amid the intensifying heat.
AccuWeather forecasts showed a robust high pressure system canvassing the South and East through the trading week, driving near-record heat across vast stretches of the Lower 48. Above-average temperatures were expected across much of the country next week, as well.
“The increased demand for cooling is going to be a problem here. This could have some impacts on the power grid,” AccuWeather meteorologist Bernie Rayno said.
In the Midwest and Northeast, AccuWeather said, a heat wave spans at least three days with a high temperature of 90 degrees or higher. The firm said highs were likely to exceed that benchmark for most or all of the week in major markets across both regions.
Utilities stocked up on gas to meet demand and ward off grid issues, supporting prices.
Chicago Citygate on Tuesday gained 3.0 cents day/day to average $2.100, while elsewhere in the Midwest, NGPL Amarillo Mainline advanced 10.0 cents to $1.900.
In the Northeast, Tenn Zone 5 200L rose 60.0 cents to $3.360.
Additionally, as Wood Mackenzie analyst Kevin Ong noted, Algonquin Gas Transmission began maintenance requiring a pipeline isolation between key compressor stations in New England. It reduced flows of gas in the region, including to Boston. The project is expected to last until June 25.
This further bolstered prices at Algonquin Citygate near Boston this week. After spiking nearly $2 the day before, the hub on Tuesday tacked on another 5.0 cents to $3.810.
“This jump is likely due to the event directly impacting the main pathway for gas heading to Boston, as well as the limited ability to reroute gas to the impacted area, and the high temperatures that have triggered heat advisories for much of the Northeast,” Ong said. “These factors are likely to cause significant upward pressure on prices” at Algonquin Citygate and “potentially the surrounding pricing hubs until this maintenance event ends.”
One important wildcard as the week unfolds: A storm system on Tuesday was gathering momentum in the southern Gulf of Mexico, according to the National Hurricane Center. The system, if it strengthens into the first named storm of the 2024 hurricane season, would be called Alberto.
“Tropical storm conditions are possible beginning Wednesday over portions of northeastern Mexico and the Texas coast,” Jack Beven, a hurricane forecaster, said in a report Tuesday.
NGI’s S. TX Regional Avg. on Tuesday gained 3.0 cents to $2.235.
