Natural Gas Forwards Weighed Down by Supply as Bulls Look for Colder Pattern Shift
Regional natural gas forward prices came under bearish pressure across the curve during the Jan. 25-31 trading period as recovering production volumes and blowtorch winter temperatures foreshadowed excess supply heading into the upcoming injection season.
Henry Hub fixed prices shed 16.0 cents for March delivery, ending the period at $2.112/MMBtu, NGI’s Forward Look data show. In turn, numerous Lower 48 hubs posted March fixed price discounts of around 15-20 cents week/week.
Mixed Near-Month Moves
Price action for the period was a bit more mixed for February delivery.
February fixed prices at a handful of East Coast demand hubs saw heftier discounts amid recent balmy temperatures regionally.
Cove Point tumbled to $4.460 for February, down 46.4 cents for the period. Tenn Zone 6 200L shed 60.4 cents to exit at $7.445 for February.
Meanwhile, a number of western Lower 48 hubs strengthened for February delivery during the Jan. 25-31 time frame, even as contracts further along the curve sold off, Forward Look data show.
Opal February fixed prices advanced to $5.080, up 46.1 cents for the period, though March tumbled 38.2 cents to $2.358.
SoCal Citygate picked up 30.6 cents for February to end at $5.334, though March through September came under heavy downward pressure at the Southern California hub.
Prices there surged a week earlier amid indications of maintenance-related pipeline constraints impacting the Southern California Gas (SoCalGas) system for the upcoming injection season. Even after selling off over the past week, recent SoCal Citygate prices remained stronger along the curve versus levels observed around mid-January, Forward Look data show.
A weeklong maintenance event beginning last Friday (Jan. 26) was limiting SoCalGas receipts at the El Paso-Ehrenberg location by around 170,000 MMBtu/d versus the 30-day average, according to Wood Mackenzie analyst Kevin Ong.
“As a result of this maintenance, gas has been rerouted through other receipt points on the system,” Ong said. “The Kern River/Mojave-Wheeler Ridge receipt point with Kern River Gas Transmission experienced the largest day/day increase, with nominations increasing by 185,000 MMBtu when the maintenance began.
“Receipts also increased at Kern River-Kramer Junction and Transwestern-Needles by 41,000 MMBtu and 40,000 MMBtu, respectively.”
Blowtorch February
Despite some impressive weekly storage withdrawals associated with a mid-January Arctic blast, forecasts have advertised exceptional warmth through the first half of February.
This comes as recent estimates showed Lower 48 production fully recovering from weather-related disruptions. Adding to the bearish pressure on prices, an extended outage at one of the trains at the Freeport LNG terminal in Texas figures to hamper export demand until it is resolved.
In other words, the year-on-five-year-average storage surplus, slashed to 130 Bcf as of Jan. 26, appears poised to quickly grow once again.
“At just over the $2 mark, the Nymex curve is trading as if we are going to run out of places to put the gas before winter is over,” analysts at Mobius Risk Group said in a recent note.
While prices could rally off such low levels at this point in the season, weather would have to cooperate, according to the firm.
Anomalously warm temperatures in the outlook have slashed weather-driven demand expectations, “and risks of a plus-2 Tcf end-of-March inventory level will increase with each passing day until there is a pattern shift,” the Mobius analysts said.
Pattern Shift Coming?
There have been glimmers of such a cooler pattern shift developing into the back half of February.
Recent weather model runs Thursday continued to show “near the warmest pattern of the past 50 years” through Feb. 13, according to NatGasWeather.
However, the data also “continued to hold prospects of a better/colder U.S. pattern Feb. 14-17 as a warm ridge sets up over western North America, providing a path for colder air over central Canada to flow into the Midwest and East,” the firm said.
EBW Analytics Group analyst Eli Rubin said the firm sees a fundamentally oversupplied market heading into the injection season.
Still, colder temperatures developing later this month or into early March “could help avert — or at least minimize or postpone — the most dire bearish price risks,” Rubin said.
It’s also possible that speculators will be reluctant to short natural gas with prices hovering near $2 at this point in the season, when a potential cold shot could “send prices flying higher at any point,” the analyst added.
The market could wait for clearer visibility into the end of winter heating, when it can shift focus to the spring shoulder season, before a bottom develops, according to Rubin.
“Our most likely October 2024 storage target calls for 4,300 Bcf,” based on recent Nymex pricing. This suggests “a 350-400 Bcf overhang for the market to clear over the next nine months,” Rubin said. The Nymex spring contracts could “slide below $2 over the next 30-45 days in an attempt to shake out production growth and bring an oversupplied market outlook into balance.”
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