As Cold Fades, Natural Gas Forwards Slide as Market Awaits Summer Heat
With late spring cold waning, but convincing signs of early summer heat absent from the latest forecasts, regional natural gas forwards lost ground during the April 20-26 trading week, NGI’s Forward Look data show.
Henry Hub fixed prices for June delivery gave up 9.0 cents for the period to finish at $2.132/MMBtu. Fixed price discounts of a few pennies to a dime were the norm for much of the Lower 48.
More volatile hubs in New England and along the West Coast, meanwhile, saw heftier discounts as the lack of intimidating weather-driven demand heading into May appeared to take some of the risk out of prices in those regions.
June fixed prices at Algonquin Citygate plunged 58.7 cents for the period to end at $3.136. In the West, SoCal Citygate gave up 27.5 cents to fall to $5.066.
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May Forecasts Mixed
The updated six- to 10-day forecast from Maxar’s Weather Desk Thursday showed unseasonably warm temperatures in the Interior West, with the southwestern Lower 48 expected to see cooler conditions.
The forecaster called for below-normal temperatures in California, “where a cut-off low hovers near the coast. The low directs rounds of showers into the state, including snow in the Sierras. Alternatively, above-normal temperatures are associated with a ridge over the Interior West, with highs in the mid-70s in Denver.”
Meanwhile, a spell of cooler temperatures expected to impact the Midwest, Ohio Valley and Interior Northeast after the upcoming weekend could be the season’s last notable bout of heating demand, according to NatGasWeather.
“This cool shot for early next week could be the last decent late season system before a rather comfortable pattern sets up over most of the U.S. May 4-15 with highs of 60s to 80s across the northern U.S. and 70s to 90s over the southern U.S. for light to very light national demand,” the firm told clients Thursday.
While the last vestiges of winter are soon to vanish, recent forecasts gave little indication of an early arrival for robust summer cooling demand, according to NatGasWeather.
“Going forward, hotter-than-normal weather patterns and lighter production are going to be needed if surpluses are to materially decrease,” NatGasWeather said. “But so far, the weather data has yet to offer when widespread heat will arrive, while U.S. production remains strong at over 100 Bcf/d.
“Although, to our view, hotter trends will show up in time, and the back end of May could tease summer heat arriving early.”
A ‘Continental Divide’?
Regional variance in winter demand has set up a “continental divide” between East and West in terms of market and storage dynamics, according to a recent research note from East Daley Analytics.
The firm cited National Weather Service data pointing to a 6% milder winter versus normal for the United States as a whole as of end-March in terms of gas-weighted heating degree days.
Coupled with strong domestic production, this has left the market with a Lower 48 storage surplus to the five-year average far exceeding 300 Bcf as summer approaches. As of April 21, the year-on-five-year-average surplus stood at 365 Bcf, or plus 22.2%, according to EIA.
“While net bearish, the national weather data fails to capture the nuance in the winter gas story,” the East Daley analysts said. “At a regional level, the winter was unusually balmy across the eastern two-thirds of the U.S., including record warmth in parts of the Mid-Atlantic and Southeast, while the West Coast and Rocky Mountains experienced a harsh winter.”
Split the numbers along the Great Continental Divide, and the EIA storage data show the Pacific and Rockies regions at a significant deficit to five-year norms, in stark contrast to hefty surpluses experienced in markets to the east, the East Daley analysts said.
This divide has fueled premium pricing at demand hubs in California and in the Pacific Northwest, as well as in the Rockies, according to the firm.
“The divergence in storage should continue to support wider regional spreads,” the East Daley analysts said. “Premium prices have been drawing gas from as far away as the Northeast via the Rockies Express Pipeline, and western prices must stay elevated to attract volumes.
“Shippers on pipelines that directly feed the West Coast, including the Permian, Rockies and Western Canada, could see gains in an otherwise tough macro gas environment.”
May Expires On Down Note
Meanwhile, the April 20-26 trading period also brought the expiration of the May Nymex contract, which rolled off the board at $2.117 after a 19.0-cent swoon on Wednesday. On Thursday, June clawed back 5.0 cents in its first day as the new front month, settling at $2.355.
ICAP Technical Analysis analyst Brian LaRose posed two possible explanations to account for recent price action.
“Bullish case, natural gas is slowly grinding out a bottom,” LaRose said. “This pullback from the recent $2.543 high in the June contract is nothing more than a minor a-b-c correction. Bearish case, the June contract is heading for a test of the $1.946/$1.944 spot lows.
“To avoid visiting the lows, one of two bands will need to provide support. The first cuts at $2.257-2.229. The second cuts at $2.143-$2.117-$2.114-$2.101.”
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