- Recent production declines still proving uplift to natural gas futures
- Latest weather models hinting at overall hot summer
- Cash prices continue to climb in most areas, but eastern markets retreat
Fresh off a nearly 14-cent run, natural gas futures edged higher again Tuesday as the market continued to digest the sharp drop in production over the weekend. With weather models hinting at an increasingly supportive picture for summer heat, the June Nymex gas futures contract settled at $1.830, 4.7 cents higher day/day. July rose 2.6 cents to $1.985.
Spot gas prices also continued to rise in most areas across the United States, although eastern markets gave back some of Monday’s gains. NGI’s Spot Gas National Avg. ultimately climbed 5.0 cents to $1.690.
Still facing suppressed demand from the coronavirus pandemic, natural gas futures have held up fairly well over the past couple of months as they have bounced back anytime the market has reached or neared lows. After sinking to around $1.65 on Friday, the June Nymex contract briefly touched $1.85 on Monday but ultimately failed to hold that level.
The prompt month made another run at $1.85 on Tuesday, this time holding firm even when the midday weather data gave back a little bit of demand. From there, buying accelerated into the regular session close, with June hitting its $1.857 intraday high in the last 15 minutes of trading.
While Monday’s rally was predicated on a sharp decline in gas production stemming from EQT Corp.’s announced cuts in Ohio and Pennsylvania, there are also some early indications that volumes from the Haynesville Shale might also be on a downward trend, according to Mobius Risk Group. Over the past 10 days, output from the Texas/Louisiana play has shown a pattern that Mobius said is more typical of declines, rather than maintenance-related losses or curtailments.
“If this truly is a sustained trend, it would be one of the more supportive indications for upside in the natural gas market,” the Houston-based firm said.
However, some midstream companies, including heavyweights Enterprise Products Partners LP and Kinder Morgan Inc., indicated during their first quarter earnings calls that the Haynesville was actually a bright spot amid the overall downturn, with producers increasingly likely to turn to the prolific gas-producing region to keep volumes flowing.
Tuesday’s increase in futures pricing also occurred on the heels of warmer long-range weather forecasts overnight. Although only a couple of gas-weighted degree days (GWDD) were added to the outlooks, the changes shown in modeling may be “more bullish than they appear just from a glance at the actual demand profile,” as both the American and European data show more expansion of upper-level ridging eastward heading into June, according to Bespoke Weather Services.
This puts the cooling degree day component of GWDDs above normal, “but also may be giving us a clue as to how the early summer pattern will evolve,” the firm said. “Such a pattern continuing deeper into June would give more of a boost to demand, as climatological normal temperatures continue to rise.”
The midday Global Forecast System model gave back a little demand for the coming 15-day forecast, in what NatGasWeather called “a solidly bearish setup” because of only localized coverage of 90-degree temperatures. Once upper high pressure becomes stronger over the country, more impressive heat is expected to follow, although such a development shouldn’t be expected until June 2-3 at the earliest, “keeping bearish weather sentiment in place until then.
“But we also must consider weather patterns will eventually become hot enough to satisfy, and the longer prices hold the recent bounce, the better the opportunity bulls will have to use hotter weather patterns as reasoning to continue driving up prices when heat finally arrives,” NatGasWeather said. “So we are at an important juncture here where bearish weather patterns currently have an opportunity to weigh negatively on natural gas prices and they aren’t, which could be concerning for bears if this were to continue.”
Meanwhile, production declines are far from over. The latest analysis from Rystad Energy estimated that U.S. gas production, excluding the Gulf of Mexico, will reach its lowest point in November, at 82.5 Bcf/d, before a gradual, slow recovery begins in 2021.
“We expect that gas production will decline every single month until November in our base-case scenario,” the Rystad team said. “This assumes a gradual reactivation of producing fields and is based on what curtailments we realistically see happening, rather than taking a basin-wide analogical approach.”
After the projected November low, Rystad is forecasting that there will be only around 1 Bcf/d added by mid-2021, with 1 Bcfd more by the end of next year. The outlook is based on a gradual recovery of the West Texas Intermediate (WTI) crude oil price toward $35/bbl and the Henry Hub gas price toward $2.50/MMBtu in the first half of next year. A more rapid reactivation of production would require stable WTI prices of $30-35/bbl in 3Q2020, Rystad said.
The June WTI contract expired Tuesday at $32.50/bbl, up 68.0 cents day/day.
More Gains For Cash
With increasing power burns as local economies start to reopen amid the coronavirus, spot gas prices continued to rise Tuesday, though gains were far more tempered than those seen at the start of the week.
The sharpest upswings were seen in producing regions. In the Permian Basin, Waha next-day gas jumped 16.0 cents day/day to average $1.650.
In the Midcontinent producing region, Enable East spot gas prices climbed 13.5 cents to $1.735, with other pricing hubs trailing behind with gains of mostly 6.0-11.0 cents.
The exception to the higher-priced producing regions was Appalachia, where markets pulled back a little following Monday’s production downturn. Dominion South cash fell 5.5 cents day/day to average $1.470, while Tennessee Zn 4 313 Pool dropped 7.0 cents to $1.505.
The losses were part of a broader sell-off that extended across the Northeast, where Transco Zone 6 NY spot gas was down 11.5 cents to $1.480.
Elsewhere, cash gains throughout the Southeast and into the country’s midsection ranged from 5.0-10.0 cents, while a couple of markets farther west posted slightly larger increases.
On the pipeline front, Southern Star declared a force majeure on Monday after receiving integrity data on its Line Segment 130, reducing capacity at its Sand Dunes interconnect with Cheyenne Plains in Kiowa County, KS, to 98 MMcf/d starting Wednesday through May 27. Receipts at the Sand Dunes interconnect have averaged 158 MMcf/d over the last 14 days but have seen a recent uptick in activity, maxing at 203 MMcf/d in the last few days, according to Genscape Inc.
“The Kansas Gas Ark River intrastate interconnect will also be shut in despite no nominations over the last month, removing it as an option for reroutes,” Genscape analyst Josh Garcia said. “The Sand Dunes interconnect is the largest supply point on Line Segment 130, but if necessary, Southern Star can source gas from Natural Gas Pipeline Co. of America and Northern Natural Gas Pipeline on that line.”
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