The selloff continued for the majority of U.S. natural gas forward markets in the final week of March as production proved too lofty amid declining weather-driven demand and healthy inventory levels.
The April contract rolled off the board between 10 and 20 cents lower, while the May contract – which took over the prompt-month position on Thursday – shed less than a dime at most locations, according to NGI’s Forward Look.
The moves aligned with the price declines seen along the Nymex futures. Benchmark Henry Hub’s April forward contract slipped just below $2.00 upon expiration. On Thursday, the newly prompt May contract lost another 8.0 cents to settle at $2.104.
The weakness perpetuated further out the forward curve as well. With uncertainty over how hot the upcoming summer may be, and little evidence thus far of a material decline in production, the robust supply trajectory sent summer (April-October) and winter 2023-2024 forward prices down by the single digits, Forward Look data showed.
“Natural gas weakness is apparent,” said The Price Futures Group analyst Phil Flynn.
With winter weather falling short this season, and exports hampered by the Freeport LNG outage, supply backed up, according to the analyst. “Supply had increased in anticipation of more liquefied natural gas exports.”
Freeport LNG had targeted a December restart of operations at its terminal on the upper Texas coast following the explosion that shuttered the facility last June. However, after a series of hiccups along the way, the export facility did not achieve a full restart of initial operations until Thursday.
NGI data showed feed gas nominations to the 2.4 Bcf/d Freeport terminal reaching 1.9 Bcf/d, a high point effectively marking the end of a nearly 10-month restart process.
Notably, there is still room to the upside for Freeport feed gas demand into the summer, EBW Analytics Group noted. A second loading dock and third LNG storage tank are expected to return to operations in the coming months, creating further upside for LNG feed gas demand.
That said, LNG demand remains in flux. Venture Global Inc. indicated in a letter to federal regulators that commissioning at the Calcasieu Pass facility is ongoing. While the terminal is able to produce LNG, it “continues to face periodic reliability challenges impacting the facility,” it said in the letter to the Federal Energy Regulatory Commission.
Specifically, failures in five horizontal heat recovery steam generators because of leaks have necessitated “extensive repairs and replacements,” according to Venture Global. Because of the estimated time it would take to resolve the issues, the LNG developer informed long-term customers that “commercial operations will be delayed.”
“Freeport is almost back, so the market needs a new facility to add some volatility,” said a participant on energy chat Enelyst.
Too Much Natural Gas
With prices soaring last year amid a steady call on U.S. LNG amid Russia’s invasion of Ukraine, along with a hotter-than-normal summer and sliding inventories, U.S. producers responded by raising output in order to meet the heightened demand.
The Energy Information Administration (EIA) said U.S. production grew by 4%, or 4.9 Bcf/d, in 2022. Output averaged a stout 119 Bcf/d, led by rising production in Appalachia, the Haynesville Shale and Permian Basin.
With prices cratering back to the $2.00 level, Wood Mackenzie analyst Eric McGuire said it remains to be seen how producers start to respond to the current price environment. He noted the contango in the forward curve, however, and questioned whether prices may need to slide further in order to incentivize some longer-term decisions through winter. “While we are at $2 in cash, October is trading just below $2.80.
“At best what you can hope for here is deferred completions,” McGuire said. “In that case, maybe you help out this summer, but then you are just kicking the can down the road and you have to worry about it again in the winter.”
Either way, supply would need to move meaningfully lower this summer to facilitate balancing the market. Demand also would need to rise. On that front, McGuire expects natural gas to face an uphill battle in the power generation sector fighting against rising renewable energy. Coal stocks also sit at more comfortable levels than last year and therefore stand ready to meet electricity demand.
Taking all of that into consideration, storage inventories may remain lofty. Already, with the winter largely in the rearview mirror, stocks are hitting unusually high ahead of the injection season.
On Thursday, the EIA said inventories for the week ending March 24 fell by only 47 Bcf, falling short of even the lowest withdrawal estimates ahead of the agency’s weekly report. Draw estimates submitted to Reuters ranged from 48 Bcf to 61 Bcf, with a median of 54 Bcf. Bloomberg’s poll showed a similar range and landed at a median pull of 55 Bcf. The Wall Street Journal found an average expected decline of 56 Bcf and a range of 52 Bcf to 63 Bcf. NGI modeled a 57 Bcf withdrawal.
That said, the 47 Bcf pull was bullish compared to historical changes in stocks for the comparable week. The EIA said stocks last year increased by 15 Bcf in the same period, while the five-year average draw is 17 Bcf.
Regionally, only the Midwest recorded a significant decline in inventories as it posted a 24 Bcf pull, EIA said. The East withdrew 12 Bcf, and the South Central pulled out a net 10 Bcf. Single-digit changes in stocks were seen in the Midwest and Pacific.
Despite the larger-than-normal withdrawal, inventories remain stout at 1,853 Bcf. This is 442 Bcf higher than last year and 321 Bcf above the five-year average, according to EIA.
“Going forward, rallies are going to be hard to be sustained until we see some real fundamental shifts in the market,” McGuire said. “And we need to see some price action down the curve, not just the front.”
West Coast Woes
Not every U.S. market faces such monumental bearish pressures, though.
The West Coast continues to see higher gas prices as unusually chilly weather continues to drive up heating demand in the region. Notably, snow in the Rockies also may keep production in the basin from fully returning for awhile longer.
The National Weather Service (NWS) said snow would continue over the Intermountain West under the influence of the deep upper-level trough and a frontal system pushing through the region. Locally heavy accumulations of up to a foot or more are possible for higher elevations in the mountain ranges of the eastern Great Basin and Northern/Central Rockies into Friday. Some light accumulations also could be expected over the Northern High Plains.
Another Pacific storm system was forecast to approach the Pacific Northwest early Friday, bringing moderate to locally heavy lower elevation/coastal rain and heavy snow accumulations to higher elevations of the Cascades, according to NWS forecasters. Moisture was expected to spread inland over the northern Great Basin/Northern Rockies by late Friday, with accumulating snowfall forecast for higher elevation mountain ranges as well.
High temperatures are forecast to remain “well below average across the West under the influence of the upper-level trough and behind the initial Pacific cold front pushing through the region,” according to NWS. Highs are expected in the 30s and 40s for the Northern/Central Rockies and Great Basin Thursday-Friday, with highs in the Pacific Northwest also dropping into the 40s Friday.
“Highs in California will only be in the 50s for most locations Thursday, with the potential for some record-tying/breaking low maximum temperatures over southern California,” NWS forecasters said.
The late-season chill comes amid direly low storage inventories in the Pacific region, along with tight pipeline capacity that leaves little wiggle room to transport more supplies to the West Coast. What’s more, a host of planned maintenance events this spring stand to keep prices unseasonably high.
For example, Wood Mackenzie noted that recent upside pressure on PG&E Southern Border cash prices may be explained by upcoming Kettleman Compressor Station maintenance. This could restrict up to 395 MMcf/d of flows through Pacific Gas & Electric Corp.’s Baja Path for the month of April.
Meanwhile, Southern California Gas (SoCalGas) is planning to take 630 MMcf/d of pipeline capacity offline from April 17-28 for Line 5000 remediation. This would coincide with other reductions along Line 4000 and at the Honor Rancho and Aliso Canyon storage facilities.
Given the ongoing volatility in California natural gas prices, one buyer noted that Pacific inventories overall have not reflected the strong regional demand. “For the second week in a row, there was nothing – zero – taken out of storage,” he said.
Indeed, Pacific inventories for the week ending March 24 actually rose by 1 Bcf, according to EIA.
“This is significant, as it raises the question of where PG&E and SoCalGas are getting supplies to balance their system,” the buyer told NGI. “They have to be buying it on the market.”
Looking at the forward curves, SoCal Citygate April prices on Wednesday were the highest in the country at $7.552 after climbing $2.10 from March 23-29, Forward Look data showed. May prices stood at $4.752, while the summer strip averaged $6.820. Winter 2023-2024 prices averaged $8.622.
PG&E Citygate April hit $6.648 after rising 80 cents through the period, and May reached $5.701, according to Forward Look. Summer prices averaged $6.820, on par with SoCal Citygate. The winter strip climbed to $7.794.
Outside of California, Rockies prices also posted significant gains at the front of the curve though prices remained below the $4.00 mark.
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