Natural Gas Futures Jump As Production Hits Brakes, Monster Draw Occurs; Slippage of spot prices

Natural gas futures advanced for the first time in six sessions on Tuesday, buoyed by production hiccups and expectations of near-record inventory draws.

At the first sight:

  • A massive storage draw is expected
  • Production slows down slightly day by day
  • A warm-up in the middle of the week is imminent

Nymex February gas futures rose 3.1 cents to $2.450/MMBtu. The contract fell to an intraday low of $2,325 in choppy trade during the morning, then moved sharply higher in the afternoon.

Point gas NGI National avg. fell 20.0 cents to $2,245, extending its decline for a third session. National avg. the price is well off the $6,220 level of a week ago, as well as the winter high of $16,770 that preceded last week’s cold snap across the country.

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“Dead cat bounce?” a participant on the online platform Enelyst said that futures have recently reached a higher value.

“It’s probably some other short-term hedge funds,” Thomas Saal, senior vice president of energy, StoneX Financial Inc., told NGI. “I wouldn’t necessarily say it’s the bottom. I mean, we didn’t even reach Monday’s maximum. It’s definitely a rebound.”

The market’s immediate concerns are the milder weather that has pushed through this week into early February — meaning heating demand is falling sharply — and the print on government storage that could exceed the 300 Bcf draw.

The US Energy Information Administration (EIA) is scheduled to release storage data on Thursday for the week ending in January. 19. NGI modeled a withdrawal of 320 Bcf for the period, which could rival the highest number recorded by the EIA in records dating back to 2010. The record withdrawal is 359 Bcf in January 2018, followed by a withdrawal of 338 Bcf in February 2021.

Residential and commercial gas demand fell 9 Bcf/d on Tuesday, mostly in the Northeast and Southeast, analysts at Gelber & Associates said.

Meanwhile, production has not fully recovered freezing that sent output up to 90.9 Bcf/d last week. Production is still down 4-5 Bcf/d this week from the early January pace and is hesitant to recover. On Tuesday, Lower 48 gas production slowed by 0.3 Bcf d/d to 101.1 Bcf/d on Tuesday, Wood Mackenzie estimated.

Further tightening supply, Canadian imports fell 1.8 Bcf/day to 6.2 Bcf/day on Tuesday, the firm estimated. Those imports jumped last week to theirs the fastest pace since at least 2012 to backfill for freezing in the US.

Meanwhile, feed gas volumes for LNG exports continue to grow stumble a week ago. U.S. LNG export terminals received just under 14 Bcf for the fifth day in a row on Tuesday. NGI US LNG Export Flow Tracker.

After a 27% plunge in the 10 days through Monday, fast-month futures are “pulling back support,” said EBW Analytics Group analyst Eli Rubin. Railings that could provide support include the washout effects of the freeze and the ever-present risks of a cold return in February.

The pace of gas production recovery “after a substantial freeze may be a stronger impediment to sustainably lower gas prices than is generally recognized,” Rubin said. The freeze may halve again this week, but the last 1-2 Bcf/d of lost output “may take several weeks or longer to recover,” he said.

On the price outlook, Rubin said he is bearish in the medium term, while in the near term he expects prices to be volatile over the next week. Analysts at Gelber took a similar view on production, saying a rebound to 103-104 Bcf/dv in the short term would put downward pressure on prices.

Weather in Whipsaw

The fast month contract fell through around $1000 over the past five sessions amid fluctuating temperatures from one of the coldest periods of the season to the January weather forecast. Feb. 23 5 trends as one of the warmest in 45 years, NatGasWeather said.

EBW’s Rubin added more context when he said models suggest the weather will “beat the warmest on record” period for the next 15 days by more than 25 degrees a day of gas heating.

Analysts at Mobius Risk Group said the big changes in weather and the resulting whipsaw in markets highlight “how quickly the market can turn and the risk of betting too much on the weather”.

But analysts warned there was “a lot of winter left” and even one standard deviation in weather anomalies could be considered “too much” or “too little” for flowing gas supplies.

StoneX’s Saal dusted off expectations that winter might be over. “Winter is not over. It might be over for a week. I’ve been doing this for a long time. We still have February and March ahead of us,” he said.

Saal said some market participants wanted to call out winter a few months ago, but then January brought the polar vortex. “That can happen pretty quickly. Mother Nature decides” when winter comes, he said.

Weather models on Tuesday continued to point to an “exceptionally warm/red/bearish setup” for much of the country through early February, NatGasWeather said. While cooler weather systems are expected to hit the western states in February. 1-5, winter is likely to try to make its way into the eastern half of the country “as a stubborn warm ridge sticks around,” the forecaster said.

The heat melts the money markets

Physical spot prices fell in almost all regions on Tuesday ahead of a warming trend into the weekend.

The National Weather Service (NWS) said temperatures in much of the eastern half of the country are forecast to climb well above normal by midweek. Several storm systems will move across the country and bring heavy rain along the Gulf Coast through Thursday, according to the NWS. Northern areas of the Midwest, Lower Great Lakes and Northeast could see freezing rain and snow through Wednesday, the meteorologist said.

Conditions in the east are expected to be considerably milder by midweek, up to 20 degrees above the seasonal average in some places on Wednesday, the NWS said. Highs in New York could reach 50 on Friday, the agency said. Meanwhile, the Southwest is forecast to be cooler by midweek, the NWS said.

The next day the road leads lower Northeast Regional Avg. drop $1,165 day/day to $2,675. Algonquin City Gate down $1,930 to average $2,710.

The Southeast, which was another region in the east that was resistant to giving up last week’s price hikes until Monday’s drop of $3,695 to $2,455, slowed its declines. Transco zone 4the region’s most traded center on Tuesday, fell 21.5 cents to $2,235.

Many pipelines have lifted operating flow orders (OFOs) limiting supply, including the East Coast, which is clear, Wood Mackenzie analysts said. Among operators releasing OFOs, Columbia Gas Transmission LLC (TCO) lifted capacity restrictions on its Lost River CS MA30 on Tuesday amid more manageable operating conditions and milder weather forecasts, analysts said.

Elsewhere, benchmark Henry Hub cash in Louisiana fell 17.5 cents to $2,155.

Earnings were mostly scattered across West Texas, California and the Midwest. PG&E Citygate pink 7.0 cents to $3,685. Joliet in Illinois added 2.0 cents to $2,090.

Tea West Texas/SE NM Regional Avg. rose 3.0 cents to $1,750.

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