Natural Gas Forwards Cook as Western Basis Premiums Rise on Supply Constraints
An overall bullish week for natural gas markets saw regional forwards rally sharply from coast to coast during the Aug. 3-9 trading period, while a mix of strong demand and supply constraints helped drive outsized gains for the western Lower 48, NGI’s Forward Look data show.
National benchmark Henry Hub set the pace for sizable fixed price gains across the board, adding 47.8 cents week/week to end at $2.956/MMBtu, just shy of the psychological $3 threshold.
Meanwhile, basis shifts revealed even stronger gains for western hubs, particularly for delivery during the coming winter.
Basis trading for the Aug. 3-9 period showed sharp upward pressure at Pacific Northwest locations both at the front of the strip and for the winter contract months. Northwest Sumas basis climbed 40.2 cents for September, with January picking up 87.5 cents. Malin jumped 73.5 cents for January delivery to finish at a $4.288 premium to Henry Hub.
Gas Transmission Northwest (GTN) declared a force majeure earlier in the week that was expected to restrict imports from Canada through Kingsgate through late in the upcoming work week, according to Wood Mackenzie analyst Quinn Schulz.
The constraint was also coinciding with maintenance on the Nova Gas Transmission system that was limiting as much as 353 MMcf/d flowing out of the Upstream James River area, according to Schulz.
“Ultimately, this may lead to even less volumes flowing through Kingsgate than GTN would otherwise allow,” the analyst said. “Plus, more upward pressure is likely applied by the fact that these untimely constraints are happening amid higher-than-normal Pacific Northwest demand for the beginning of August.”
Farther south, SoCal Citygate also strengthened along the winter strip, with December gaining 76.1 cents week/week to finish at plus-$6.354. SoCal Border Avg. December basis shot up 51.6 cents for the period, ending at a $4.835 premium to the national benchmark.
A brutal winter followed by a sizzling hot summer in California has pushed state regulators to recommend increased use of the Aliso Canyon storage facility. The move comes as elevated natural gas prices have persisted in the region, a trend that’s poised to continue based on recent forward curves.
According to U.S. Energy Information Administration (EIA) data, the Pacific region injected 3 Bcf for the week ending Aug. 4, leaving the region at an 11.7% deficit to the five-year average, even as the rest of the Lower 48 heads into winter with a sizable inventory surplus.
Southern California Gas (SoCal) has refilled storage at a rapid pace during the injection season, injecting 15.5 Bcf more than the prior five-year average since April, according to Wood Mackenzie’s Schulz.
“This quick rate of injection was slowed by an unplanned maintenance on Line 225, which nearly shut in all Wheeler Ridge receipts between July 27 and Aug. 7,” the analyst said. “But now that the 720 MMcf/d of capacity has returned, SoCal has loosened significantly and could return to rapid injections.
“Assuming that Aliso Canyon reaches its existing capacity of 41.16 Bcf by the end of August, SoCal would need to inject 27.44 Bcf by the end of October” to reach a potential increased limit of 68.6 Bcf, or 15.84 Bcf to raise stockpiles to 57 Bcf.
Reaching the potential increased capacity limits during the injection season “seems feasible,” Schulz said. However, maintenance events in August could restrict receipts into the system and limit injections, the analyst added.
These include planned events on SoCal’s Line 2000 and on the El Paso Natural Gas system, according to Schulz.
Mid-Week Madness
The week/week changes in the latest Forward Look data reflect trading as of Wednesday, which saw Nymex futures surge 18.2 cents higher. The mid-week really appeared to stem from some combination of weaker production, technical momentum and rallying European prices.
The overseas price spike occurred on the prospect of a labor strike affecting Australian LNG exports.
News sent European natural gas prices surging Wednesday, with the Dutch Title Transfer Facility benchmark jumping nearly 30% to finish near $13/MMBtu, the largest gain since March 2022.
“Any such strike could disrupt about half of Australia’s” exports of liquefied natural gas and could “cause many Asian buyers to look elsewhere for their cargoes,” Rystad Energy analyst Zongqiang Luo said in a note to clients. “…This price surge reflects the likelihood of the strike materializing, impacting LNG supplies during the ongoing heatwaves, despite the ample gas inventories in Europe.”
The TTF spike highlights Europe’s vulnerability to potential winter shortages even with the continent’s storage “filling to the brim,” EBW Analytics Group analyst Eli Rubin said.
“In our view, we continue to anticipate a possible weakening in prices — particularly if Australian labor issues can be resolved — as short-term technical volatility ebbs and gas supplies are forced into more expensive floating storage.
“In the interim, however, both Dutch TTF and Nymex gas futures jumping to multi-month highs on the same day point to an enduring technical transatlantic pricing correlation.”
Prompt Retreat
However, the gains from Wednesday’s rally vanished entirely in Thursday’s session, as the September Nymex contract plummeted 19.6 cents to settle at $2.763.
A net 29 Bcf injection in the latest EIA storage data saw the still-comfortable inventory surplus to the five-year average shrink at a slower-than-expected rate.
This coupled with updated estimates showing domestic production back above the 101 Bcf/d mark, although Wood Mackenzie’s latest estimate Thursday came in at 101.4 Bcf/d, and it reinforced impressions that the market remains oversupplied heading into winter.
Meanwhile, the prompt TTF contract on Thursday closed 7% lower to finish slightly below $12, while the October contract gave up 6% to settle at $13.02. The slide came a day after the prompt contract surged in a session that was partly influenced by short covering as traders bought back gas they had sold as prices moved against them.
Domestic natural gas prices as of Thursday were “still higher on the week, aided by seasonal buyers that have been front running ahead of what’s expected to be tighter supplies as surpluses drop further in the weeks ahead…due to a rather hot pattern for the rest of the month,” NatGasWeather noted.
Cooler trends in recent runs of the European weather model may have also contributed to Thursday’s retreat, according to the firm.
Should summer heat reduce year-on-five-year surplus down to near 200 Bcf, it would “present a much more interesting situation going into late fall,” NatGasWeather said. Should weather-driven demand surprise to the upside early in the withdrawal season, “especially with an El Nino in place, risk on trade would be expected.
“This makes weather patterns in the coming months quite important, especially if enough heat lasts through September to steadily whittle down surpluses.”
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