Natural Gas Forwards Rally on Signs of Easing Oversupply
With a sharp decline in upstream activity foreshadowing a potential curtailment in domestic production, and with summer cooling demand just around the corner, natural gas forwards rallied during the May 11-17 trading period, NGI’s Forward Look data show.
Week/week fixed price gains of 20 cents or more were widespread throughout the Lower 48; benchmark Henry Hub rose 17.7 cents for June delivery to end at $2.370/MMBtu.
Last week’s news of a 16-rig decline in natural gas-directed drilling in the latest Baker Hughes Co. data catalyzed a move higher for futures prices, and regional hubs rallied accordingly during the May 11-17 trading period.
The sudden drop-off in upstream activity prompted market participants to gaze into the proverbial crystal ball, where they caught a glimpse of easing oversupply conditions, despite expectations for a series of plump storage builds in the weeks ahead.
Still, pleasant temperatures through the end of May kept a lid on forward prices overall, with most locations not venturing much above the $2.00 mark.
Despite a 12.2-cent basis gain, Chicago Citygate ended the period at a 12.9-cent discount to Henry Hub for June. In the Pacific Northwest, Northwest Sumas June basis rallied 13.8 cents, finishing 39.6 cents back of Henry Hub.
Meanwhile, producing area hubs in the Northeast saw negative basis shifts during the period, with plentiful supply keeping pressure on prices in the nearer term. Eastern Gas South June basis ended at minus 92.9 cents, an 11.0-cent swing lower through the period.
The latest runs of the American and European weather models Thursday continued to point to “light to very light” weather-driven demand over the next two weeks, according to NatGasWeather.
“The focus going forward is still when widespread heat will arrive across the eastern half of the U.S.,” the firm said. “Longer-range weather maps continue to show more impressive heat gaining ground over the U.S. as the calendar progresses through June…we continue to believe the risk is hotter trends show up for June 1-10 in time.”
Rig Activity Mixed For Major Plays
The latest Enverus rig data showed the U.S. count peaking at 780 during the week ended May 17, a net decline of six versus the week-earlier period.
“The count is down 4%, or 35 rigs, in the last month and down 5% year/year,” Enverus analysts said.
Still, among major plays, rig activity was mixed for the most recent period, according to the firm’s data.
“Only half of the major plays saw declines in rigs,” the Enverus analysts said. “The Appalachian Basin added two rigs to reach 53, and the Denver Julesburg Basin had a one-rig bump to 18. The Anadarko Basin was flat week/week at 63 rigs. The Permian, Gulf Coast and Williston each dropped one rig to 341, 88 and 38.”
The “massive” 16-rig drop in the most recent Baker Hughes count marked the largest week/week decline in natural gas rigs in seven years, according to EBW Analytics Group.
Even so, the subsequent price gains “may have already tapped out the majority of fundamental upside for natural gas futures,” EBW analyst Eli Rubin said.
In the coming weeks, the market has to endure “repeated triple-digit injections” that “are historically correlated” with lower prices, the analyst said.
“While our long-term fundamental outlook continues to point to further gains in the back half of the injection season, near-term softness is favored,” Rubin said.
EIA Delivers Bullish Surprise
While heftier injections could still be in the cards in the coming weeks, Thursday’s Energy Information Administration (EIA) storage report defied expectations by landing just shy of the triple-digit mark, corroborating the bullish case for a market already sensitive to signs of easing oversupply.
After trading in a narrow range the previous few sessions, the June Nymex contract surged 22.7 cents on Thursday to settle at $2.592.
“What was supposed to be a streak of three to five 100 Bcf-plus builds suddenly is in jeopardy of potentially reaching only two or three weeks,” NatGasWeather told clients Thursday following the latest EIA print. This is especially the case “when considering estimates for next week are certain to drop after today’s report, and with very light wind energy generation this past week.
“What today’s bullish EIA miss also did was partially confirm” the recent Baker Hughes data, “thereby suggesting production is lighter than what’s been reported.”
Alberta Wildfires Rage
Also factoring into the supply picture, Alberta was continuing to deal with wildfires during the May 11-17 trading period. As of the May 16 gas day, Wood Mackenzie estimated roughly 1.6 Bcf/d of production shut in amid the dozens of blazes reported throughout the province.
“After seeing some relief last week, the Alberta wildfires continue to worsen,” Wood Mackenzie analyst Laura Munder told clients Thursday. “…Though rain is in the forecast for early next week, conditions are expected to worsen going into the weekend, with hotter and drier weather, potentially leading to more active wildfire behavior.”
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