Blistering heat through much of the summer and limited supply flowing west from the Permian Basin kept storage injections in the Pacific region in check, helping to dramatically dwindle a once-massive surplus of natural gas.
Peak temperatures in the 90s and above permeated California this summer, while wind generation demand proved inconsistent, driving strong demand for natural gas to power air conditioners. The Energy Information Administration (EIA) said Thursday that utilities in the Pacific injected a paltry 1 Bcf into storage for the week ended Aug. 16. It followed a 2 Bcf withdrawal the previous week.
The Pacific surplus relative to the five-year average narrowed from above 40% in March to 16% at the end of July. As of mid-August, it was down to 9.9%, according to EIA. The national surfeit also hovered around 40% in March and has steadily shrunk, though it stood at about 13% over the past two EIA report periods.
While temperatures nationally are projected to cool in September, the 2024 Old Farmer's Almanac called for above-average heat next month in Southern California and the Southwest. That is notable because California buyers compete with major markets in the Southwest for Permian gas. While there is an abundance of associated gas produced in the Permian, multiple maintenance events throughout the spring and summer restricted flows leaving the prolific basin. This backed up supplies in New Mexico and West Texas.
That has yet to impact prices meaningfully in the Pacific because of the storage surplus. However, should inventories fall in the region, the situation could change quickly. Last year, when storage was light and maintenance events curtailed Permian output at various points, Southern California prices spiked into the double-digits. At the start of August last year, Pacific inventories were 13.5% below historical norms.
PG&E Citygate in Northern California averaged $2.270/MMBtu on Thursday, NGI data show, while SoCal Citygate clocked in at $1.550. Both topped NGI’s National Avg. of $1.375.
NGI’s Josten Mavez, senior energy analyst, noted that overall production has declined this summer – from a high near 103 Bcf/d to recent lows just below the century mark. Leading producers have said they are prepared to curtail output in the fall if prices remain soft.
At the same time, “there's quite a bit of maintenance planned on pipelines flowing gas west” in September, Mavez said.
Historically, Pacific stockpiles proved volatile, given Permian backups, the massive population of the West Coast, and the potential for extreme heat during the summer months. While known for its warmth, California in recent years has also experienced bouts of harsh winter weather that has driven strong heating demand. In early 2023, for example, portions of the state were buried under record snowfall.
What’s more, storage capacity in the Pacific is relatively limited – roughly a third of the South Central region, for example. Pacific storage was about 78% full at mid-August, Mavez noted.
Permian takeaway capacity is about to improve with the completion of the 2.5 Bcf/d Matterhorn Express Pipeline. It is due online by October. Matterhorn “will have big impacts on gas flows from the basin,” said East Daily Analytics analyst Maria Paz Urdaneta.
Yet, it has already been delayed once this year. It was slated to start this summer but was pushed back because of interruptions caused by Hurricane Beryl in July.
When it does come online, Matterhorn may not prove a panacea for western supply needs. It won’t be long before five LNG projects now in the works along the Gulf Coast will add competition for Permian supply, Wood Mackenzie analysts noted. The new projects could increase U.S. export capacity from around 14 Bcf/d to nearly 25 Bcf/d by the end of the decade.
Storage Overhang
From a national perspective, Paragon Global Markets LLC’s Steve Blair, managing director of institutional energy sales, told NGI that further storage surplus improvements may be hard to come by after August.
“The issue now is that summer is quickly coming to an end in many parts of the Lower 48… Cooling demand will continue to become less and less of a factor as we move into September,” Blair said. “Producers are expected to begin curtailing as we move into the shoulder season, which could help prices. But at that point, demand may be waning so the impact could be temporary and minimal.”
What’s more, he added, tropical weather in the Atlantic Ocean is forecast to peak in the fall and could slow liquefied natural gas exports – “and thus less feed gas flows if a major hurricane hits the Gulf Coast.”
Those bearish factors in concert with a larger-than-expected national storage injection for the latest EIA period helped to explain why the September Nymex natural gas futures contract dropped 12.4 cents Thursday and settled at $2.053. It slipped further early Friday.
EIA printed a 35 Bcf injection for the Aug. 16 period. Ahead of Thursday’s EIA report, NGI predicted a build of 27 Bcf. That was in line with the median of a Reuters survey. A Bloomberg poll landed at a median of 25 Bcf.
The actual result boosted inventories to 3,299 Bcf.
Early estimates submitted to Reuters for the Aug. 23 week ranged from injections of 20 Bcf to 53 Bcf, with an average increase of 36 Bcf. That reflects lower production readings this week and compares with a five-year average build of 43 Bcf.
