As natural gas markets restlessly awaited the arrival of more impressive cooling demand, regional forwards tumbled from coast to coast during the May 25-31 trading period, NGI’s Forward Look data show.
July fixed prices at benchmark Henry Hub shed 30.6 cents for the period to end at $2.267/MMBtu. Discounts of around 25-35 cents were common throughout the Lower 48.
In the Midwest, Chicago Citygate July prices dropped 28.7 cents to average $2.107, while in the Mid-Atlantic, Transco Zone 5 shed 25.7 cents to $2.843. Farther south, Florida Gas Zone 3 gave up 37.3 cents to $2.882.
[How much more U.S. natural gas storage capacity is needed — and is it on the way? Join NGI’s Director of Strategy & Research Patrick Rau, as he dives into what’s around the corner in terms of natural gas storage and the market fundamentals driving it. Listen now.]
A few West Coast hubs posted steeper fixed price discounts. PG&E Citygate July prices plunged 81.0 cents to end the period at $4.162.
Summer On Hold?
Memorial Day serves as the unofficial start of summer. The pools open. Grills are fired. Jackets are increasingly swapped out for t-shirts and shorts. But from a natural gas demand standpoint, bulls spent the holiday waiting for the season to start in earnest, disappointed by June forecasts that lacked the heat needed to impress traders.
That absence of heat further prevented the market from building on the bullish momentum created by a surprisingly steep drop in natural gas-directed drilling last month.
Updated forecasts as of Thursday advertised comfortable conditions for much of the country to start June, flashing the potential for more intimidating heat to develop as the month progresses, according to NatGasWeather.
Midday data from the American model Thursday showed increasing demand for June 11-15 as high temperatures in the 90s were expected to increase in coverage across Texas, the South and the Southeast, the firm said.
“Longer-range weather maps maintain a rather hot U.S. pattern gaining ground during the second half of June as highs of 90s increase over the southern half of the U.S.,” NatGasWeather said.
With markets “getting more impatient by the day waiting on widespread heat to arrive,” a lot could hinge on how June weather patterns develop in the coming weeks, according to the firm.
“If hotter patterns don’t come through for mid and late June, and if U.S. production doesn’t show any signs of declining, bears could have eyes for $2 sooner than later,” NatGasWeather said. “Conversely, if hotter patterns were to come through for the second half of June, and if power burns prove more impressive than market expectations, we must expect a short-covering rally.”
Storage Levels Swell
Nymex futures lost ground throughout the May 25-31 trading period, weighed down by the prospect of continued production strength and lackluster early June heat further padding the current inventory surplus.
The June Nymex contract posted a double-digit decline in its last day of trading, rolling off the board at $2.181 ahead of Memorial Day weekend. July, trading at a more than 20-cent premium to June heading into the weekend, sold off sharply in post-holiday trading.
Following a sizable triple-digit injection from the latest Energy Information Administration (EIA) storage report, July settled at $2.158 Thursday, off 10.8 cents on the day.
EIA reported a 110 Bcf injection for the week ended May 26, exactly on target with NGI’s modeling for the print. The build outpaced the 101 Bcf five-year average injection. Inventories exited the period at 2,446 Bcf, a 349 Bcf (plus 16.6%) surplus to the five-year average, according to EIA.
“Elevated production, subdued LNG and cooling demand reverting lower may enable the storage surplus to approach 400 Bcf above five-year norms into late June,” EBW Analytics Group analyst Eli Rubin told clients in a recent note. “While our long-term storage trajectory is sharply lower and the medium- to long-term fundamental outlook points to upside price potential, natural gas may have to muddle through a near-term soft patch in coming weeks first.”
In the near term, forecasts showing cooler-than-normal temperatures blanketing the southern half of the Lower 48 have undermined the anticipated seasonal rise in power burns, as have gains in wind and nuclear generation, according to Rubin.
“Near-term cooling demand is expected to languish below 30-year normals through mid-June as a cool southern tier of the country crushes early-season cooling demand,” the analyst said. “…Power sector demand may still rise 10 Bcf/d over the next five weeks — but meaningful increases” were not expected to materialize in the nearer term.
Congress To Rescue MVP?
Meanwhile, new developments in Washington, DC, could reshape the natural gas supply outlook longer term.
The Biden Administration and House Republicans reached an agreement over the Memorial Day weekend to raise the debt ceiling.
The proposed House bill included provisions to authorize the Mountain Valley Pipeline’s (MVP) permits and shield the embattled natural gas pipeline from further setbacks in court.
The bill also included permitting reforms aimed at streamlining federal environmental reviews.
According to analysts at Tudor, Pickering, Holt & Co. (TPH), a less obstructed permitting process could impact the outlook for natural gas prices in the event new infrastructure reduces Northeast supply constraints.
“Early indications from industry are that a more streamlined process could see previously tabled projects come back to the drawing board, though we will likely need to see successful test cases before large-scale, interstate projects make it into the mix,” the TPH analysts said in a recent note. “Ultimately, a significant improvement in permitting ability would have meaningful implications for the natural gas cost curve if Northeast supply constraints were mitigated in coming years.”
As for the MVP provisions in the debt bill, EBW’s Rubin said the firm was penciling in additional production in its 2024 outlook based on the news.
“While the debt ceiling bill itself would need to be passed in its current form…we have increased our 2024 production target by 1.0 Bcf/d,” Rubin said. “If the project can be placed in-service before the end of 2023, elevated Appalachian pipeline takeaway capacity could help head off shortage risks into next year.”
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