The January natural gas futures contract stumbled out of the gate on its first day as the front-month Wednesday, tripped up by stubbornly warm forecasts for early December and bears sticking to their oversupply views a day before the government’s weekly storage report.
At A Glance:
- January Nymex falls 3.3 cents
- Spot prices fall ahead of warmer stretch
- El Niño reading flashes stronger
The January Nymex natural gas futures contract settled at $2.804/MMBtu, down 3.3 cents day/day. February fell 2.9 cents to $2.769.
NGI’s Spot Gas National Avg. dropped 57.5 cents to $3.170, pulled lower by declines in eastern regions where the frigid cold was expected to ease into the weekend. Price drops were broadly spread across regions, with some exceptions like West Texas. Permian Basin supply has rebounded after a gas leak-caused shut-in early in the week and should soon tap an expanded Permian Highway Pipeline LLC (PHP).
Production on Wednesday remained elevated following three 106.0 Bcf/d days of production over the past week, but with estimates more varied than usual.
Bloomberg estimated output fell by about 1 Bcf/d to 104.3 Bcf/d from Tuesday, mostly on declines in the Appalachian region, Haynesville Shale and Texas. Wood Mackenzie, meanwhile, said production rose by more than 1 Bcf/d to 105.4 Bcf/d from Tuesday, driven by gains in the East and South Central regions.
Mobius Risk Group analysts said the “newly reported record high for production” has magnified the El Niño-influenced weather setup. Overall weather model outputs continue to point to widespread warmth to start December, they said.
In addition, sea surface temperatures that define the El Niño pattern have risen to one of the stronger readings on record for this time of year, the analysts said. This reading does not mean El Niño conditions “will remain locked in” or more importantly, that the current El Niño is expected to deliver a weather pattern akin to the last significant El Niño winter in 2015-2016, according to Mobius.
Any Hope Of Winter?
Echoing that view, independent meteorologist Corey Lefkof said he has told his clients “ad nauseam, this is not 2015 Super El Niño.” To the contrary, there are early hints that the weather pattern may start to turn colder by the end of December, he said on the online platform Enelyst.
The European model on Tuesday hinted at a pattern change leading up to Christmas week, and if the colder trend pans out, the market could be asking “what Niño?” in about a month, according to Lefkof. “Everything tells me it’s a matter of when, not if, a transition to a colder regime can take place, but first we must get source regions colder.”
But before then, the weather models are solidly bearish into the second week of December. “As if it wasn’t possible for the weather data to trend further warmer,” NatGasWeather said the American model shed another 6 heating degree days (HDD) overnight. By midday Wednesday, the firm said the model was running nearly 75 HDDs of demand below normal for the next 16 days.
Both weather models “couldn’t be much warmer for Dec. 2-12” period, the firm added, so the risk is some demand is added in over time. Gas in storage surpluses “are likely to balloon to over 300 Bcf” if the period does not trend colder, according to the firm.
The market is set to get its next major update on supply Thursday when the U.S. Energy Information Administration (EIA) prints the latest week of storage data. NGI is modeling a withdrawal of 9 Bcf for the week ending Nov. 24, much lighter than the year-earlier pull of 80 Bcf and a five-year average withdrawal of 44 Bcf.
Estimates submitted to Reuters ranged from a withdrawal of 31 Bcf to an injection of 7 Bcf, with a median draw of 14 Bcf. Bloomberg’s poll spanned estimates of a 17 Bcf draw to a 10 Bcf build and produced a median 9 Bcf withdrawal. The average from The Wall Street Journal’s survey came out to a 13 Bcf reduction.
Last week, the EIA reported a 7 Bcf withdrawal, upending expectations for a modest injection for the week ending Nov. 17, which gave bulls a one-day boost.
The week ending Nov. 24 “had part of a holiday, very mild weather, and lofty production levels to contend with,” Mobius analysts said. A result of anything less than a 15 Bcf injection “would logically be considered an undersupplied market for the week” given the year-ago pull was driven by 60 more HDDs of demand, the analysts said. But with at least one more expansion of the storage surplus still to come, such a result “may not be enough for the market to ease up on the selling pressure.”
EBW Analytics Group analyst Eli Rubin agreed with the bearish tilt for markets. “The one-two combination of soaring gas production and warm weather offers a staunchly bearish medium-term outlook.”
But he held out there are several factors that could lead to a pause in selling in the short term.
“The Thanksgiving holiday and linepack increase odds for another surprise EIA storage report,” Rubin said, in addition to the January moving to the front month, technical indicators for natural gas futures “flashing oversold conditions” and traders with short positions possibly opting to take profits.
East Drags Spot Lower
Next-day cash prices fell in most regions on Wednesday, led lower by steep declines in the East ahead of expected lower heating demand into the weekend.
In the Northeast, Algonquin Citygate cash prices fell $6.660 day/day to an average $3.495. In the Southeast, Transco Zone 5 dropped $4.970 to $3.430.
Declines were more modest in the Rocky Mountains, Appalachia and Midwest regions as well as in the South/East Texas-South Louisiana belt. Columbia Gas shed 13.0 cents to $2.220, and the Houston Ship Channel fell by 6.0 cents to $2.500.
The National Weather Service (NWS) said chilly conditions are expected to moderate in the Southeast and Midwest Thursday, with highs 10-15 degrees warmer and closer to average. The Appalachia and Northeast regions should see highs in the 40s, up from the 20s and 30s Wednesday, according to NWS.
The forecaster kept in place frost and freeze-related advisories for the Florida Panhandle and south Georgia because temperatures may dip near and below freezing early Thursday.
Meanwhile, colder air is expected to sweep across the Rockies and Upper Midwest, dropping their highs into the 20s and 30s on Thursday, according to NWS data.
Price gains, meanwhile, were confined to the West and its major supply hubs in the Permian. The W. TX/SE NM Regional Avg. rose 42.5 cents to $2.045, supported by gains at all its hubs. Work to restore capacity on the PHP pipeline was completed after a leak was discovered Sunday. The PHP pipeline was also scheduled to add an additional 0.55 Bcf/d capacity on Dec. 1.
Prices also rose in California. Southern Border, PG&E, for example, rose 76.5 cents to $5.900.
