Natural gas futures gave up more ground on Friday, hindered by robust supplies and exceptionally mild late-winter weather conditions.
At A Glance:
- Heating demand fades
- Production remains high
- Storage surplus increases
Coming off a 4.1-cent decline the previous session, the March Nymex gas futures contract on Friday fell another 12.9 cents day/day and settled at $1.603/MMBtu.
NGI’s Spot Gas National Avg. lost 8.0 cents to $1.450.
Futures had jumped Wednesday after Chesapeake Energy Corp., a major Lower 48 natural gas producer, said it would scale back its output this year in response to low prices. The announcement awakened bulls who had waited for firm signs of a production pullback.
However, more would need to follow Chesapeake’s lead to drive down output overall, said Paragon Global Markets LLC’s Steve Blair, managing director of institutional energy sales. He noted that production hovered between 103-104 Bcf/d in recent days, down from the all-time highs around 107 Bcf/d reached early this year. Still, production remains about 5 Bcf/d above year-earlier levels – with demand also weaker than last winter.
“Market fundamentals remain bearish despite the Chesapeake news with very weak domestic demand,” Blair told NGI. “The only hope in this market” is for “other large producers to follow suit or we get early cooling demand…because we are close to the end of the heating season at this point. The fact that production is so much higher than last year exacerbates the bearishness of the market.”
Indeed, National Weather Service (NWS) data on Friday pointed to a warmer-than-normal pattern extending through the end of this month and to the middle of March. Aside from a brief bout of frigid air that was expected over the weekend in parts of the Midwest and Northeast, freezing daytime temperatures were projected to prove largely elusive for the remainder of winter.
“This downside reaction was not unexpected in my mind,” Blair said of the late-week slump. “It’s possible that we may have seen the low of the downside for now. These may be good bargain levels for long hedgers” in the week ahead.
Plump Supply
The combination of benign weather and robust production resulted in a series of seasonally anemic storage withdrawals this year. The latest U.S. Energy Information Administration (EIA) print, released Thursday, was no exception.
EIA posted a 60 Bcf pull of natural gas from storage for the week ended Feb. 16 – well below the five-year average draw of 168 Bcf. Inventories stood at 2,470 Bcf in mid-February, 22% above the five-year average. Stocks in the heavily populated Pacific region were 28% above historical norms and South Central supplies were ahead 24%.
Analysts at The Schork Report called the latest EIA result “measly” and said more small pulls lie ahead. Given warmth into March, they estimated a 60% probability of U.S. storage finishing withdrawal season above 2 Tcf – a level widely viewed as bearish for prices.
Looking at the next EIA print, preliminary draw estimates submitted to Reuters for the week ended Feb. 23 averaged 97 Bcf. That compares with a five-year average decrease of 143 Bcf.
Mobius Risk Group analysts said the current season – “the winter that wasn’t” – is on track to finish among the three warmest winters on record.
They noted the industry expects a surge in LNG demand either later this year or by next, with a host of new liquefied natural gas export facilities in the works along the Gulf Coast. This is a big reason producers ramped up to record levels.
For now, the Mobius team added, domestic weather-driven demand tends to trump all other factors. “This proves how powerful the force of weather is, as these bullish leaning [LNG] headlines are dwarfed by the effects of losing at least 200 Bcf of weather sensitive demand in the past couple of weeks,” they said.
Soft Spot Prices
Cash prices cratered across most of the Lower 48 on Friday, hindered by the spring-like weather in February.
NWS forecasts showed above average temperatures across much of the Lower 48 for the week ahead, with highs approaching 60 degrees at times in markets as far north as Minneapolis. Southern markets could see widespread 70s and low 80s. More of the same is projected for early March.
Ahead of that, SoCal Citygate fell 33.5 cents day/day to average $2.450, and Dawn in the Midwest shed 7.5 cents to $1.615.
Houston Ship Channel dropped 22.0 cents to $1.100, while Florida Gas Zone 3 fell 9.5 cents to $1.490.
Northeast prices proved the exception, with the weekend cold shot expected to impact New England and galvanize a bounce in heating demand. Algonquin Citygate near Boston climbed $1.045 to $3.140.
While temperatures are expected to be mild in the coming week, swaths of the central and eastern United States could see violent storms, said Alex Sosnowski, AccuWeather meteorologist. This presents the possibility of both power outages and production interruptions.
“The potential for a multiple-day severe weather outbreak, including tornadoes, continues to build from portions of the Great Plains to large parts of the Mississippi, Ohio and Tennessee valleys spanning Tuesday and Wednesday,” Sosnowski said. “The severe weather risk may even reach parts of the Appalachians and Eastern Seaboard on Thursday.”
The front could ride “a strong jet stream that will lunge eastward from the Rockies,” Sosnowski said. “Temperatures are likely to surge to record-high levels by day and remain at unusually warm levels at night in much of the central states ahead of the front…All modes of severe weather are possible, ranging from powerful wind gusts and large hail to flash flooding and even a few tornadoes.”
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