Bitterly cold temperatures blanketed the Lower 48, and the deep freeze threatened to curb output throughout most of the country’s production basins. Long-held storage surpluses have quickly eroded and export demand continues to fire on all cylinders.
It was, by all considerations, the perfect storm to send natural gas futures rocketing sharply higher. And yet, in anti-climatic fashion, natural gas futures failed to sustain a $3 handle during the Feb. 4-12 period, slipping a couple of cents on the week to settle Friday at $2.912/MMBtu. The rest of the curve also barely budged, with modest losses at the front of the curve and meager gains further out.
U.S. markets moved similarly, with very small changes across the majority of forward curves.
Instead, all the wild swings happened in the cash markets this week, with prices screaming higher as sub-zero temperatures draped across a large swath of the country’s midsection. With a train of winter blasts tracking through the Lower 48 and heading east, there were the usual price gains in the Northeast, but market hubs in the normally quiet Midcontinent market also got in on the action.
By Friday, spot gas at Oneok Gas Transmission, or OGT, had surged as high as $600 as the mercury in Oklahoma was set to fall to near zero overnight. Up to 10 inches of snow also was possible.
It’s not that futures traders haven’t expressed at least some enthusiasm for the winter blast. March Nymex futures have made brief appearances above $3.000/MMBtu on a couple of occasions. It’s just that prices quickly reversed course any time that level was reached. The prompt month settled Wednesday at $2.911 and then continued to languish through Friday.
“The coldest pattern of the past two years keeps getting sold after each bounce to $3. The back end of the forecast being warm weighted for Feb. 22-27 does stand out,” said NatGasWeather. “However, there’s still three much larger-than-normal draws lined up that will flip surpluses of 152 Bcf to deficits over 200 Bcf, which isn’t bearish.”
The National Weather Service (NWS) said below-freezing high temperatures are on tap in the northern Rockies and High Plains, with wind chills making for “dangerously cold” conditions. The expansive dome of sub-freezing temperatures across the northern tier of the country has laid the foundation for winter storms to wreak havoc from coast-to-coast not only going into this weekend, but also into next week. Heavy snow and ice were expected to fall through the Pacfic Northwest, while on the East Coast, snow or a wintry mix were forecast over parts of the Mid-Atlantic, the forecaster said.
Tudor, Pickering, Holt & Co. (TPH) said although price action along the Nymex futures strip has been underwhelming, “the disappointment may be fleeting if the fortnight ahead lives up to the hype.” TPH analysts are projecting a 240 Bcf withdrawal in the next government storage report and see a shot of eclipsing 300 Bcf for the following week.
The most recent Energy Information Administration (EIA) data was a big letdown for the gas market. The EIA on Thursday said that inventories for the week ending Feb. 5 tumbled 171 Bcf to 2,518 Bcf, which was about 10 Bcf below expectations.
“Fundamentally, there remains no threat to winter supply adequacy, removing the major winter upside price driver,” EBW Analytics Group said.
However, stocks, which totaled 2,518 Bcf as of Feb. 5, did manage to flip the 41 Bcf year/year surplus in the prior weeks to a 9 Bcf deficit. TPH analysts noted that in two weeks, when the frost melts and the dust settles, it’s likely storage levels also are at a deficit to the five-year average. If forecasts for a cold March hold, then inventories may draw down to the 1.5 Tcf range versus its current forecast of 1.6 Tcf.
“As storage inflects at the end of Q12021, the focus will turn to refilling storage and the flexibility of coal to step back in as gas prices rise,” TPH said. “Given the decimation of the coal sector, it’s possible economic switching is less elastic than modeled, which means even more upside for gas prices this summer versus our $3.25 target.”
With inventories expected to be sufficient even with the multi-week winter blast, EBW said Nymex futures have correctly abstained from adding near-term risk premiums. Instead, all the action has taken place in the cash market, which has provided an outlet for the bullish enthusiasm.
“Still, the demand gains should have been large enough to lift the entire forward curve,” EBW said. “Even on an injection season-long basis, we calculate that prices would have had to rise 35 cents or more just to replace incremental near-term demand since Martin Luther King, Jr. weekend, carrying prices above $3.00.”
Morgan Stanley Research analysts agreed that prices needed to move higher. The team, led by equity analyst Devin McDermott, said the U.S. gas market entered 2021 with impaired supply and growing demand. However, the resulting market tightness was masked by the mild start to the winter season.
However, the biting weather that has materialized in February has accelerated inventory withdrawals and boosted prices. Therefore, the Morgan Stanley team continues to forecast Henry Hub prices averaging around $3.00 this year, which is in line with the 2021 Nymex strip.
TPH analysts agreed the bullish backdrop has been building for gas. The team said there seems to be nowhere to hide from the Arctic chill that’s settled over North America, with cold also returning to Europe. More than 34 Bcf has been withdrawn in the last two days, according to analysts. This brought the weekly draw to 172 Bcf, versus norms of 133 Bcf, and dropped inventories to a 5% deficit to the five-year average.
The pull “marked the first trip south of the benchmark since early 2019,” TPH said. “As storage levels plummet around the world, not only does full liquefied natural gas utilization seem the likely outcome, but conversations are beginning to crop up about there not being enough gas to go around, which could really drive some interesting pricing action as we move through the summer.”
The March Nymex contract settled Friday at $2.912, up 4.4 cents from Thursday’s close. April edged up 4.0 cents to $2.876.
To The Max
By next year, Morgan Stanley analysts see a dramatic shift in production taking place in Appalachia. Following a multi-year pipeline buildout, output in the region has been unconstrained for the last couple of years, and long-term producer commitments were generally “under-water,” they said.
However, the cancellation of the Atlantic Coast Pipeline, growing risks for the completion of the Mountain Valley Pipeline and an increasingly uncertain regulatory environment that threatens new infrastructure projects combine to drive almost full pipeline utilization in the region by next year.
“As a result, to meet our constructive outlook for natural gas demand, the ‘call’ on marginal gas production would shift to other, higher-cost basins,” Morgan Stanley said. “Coupled with rising demand pull from the Gulf Coast, this should put upward pressure on Henry Hub prices and cause differentials in Appalachia to widen.”
RBN Energy LLC analyst Sheetal Nasta shared a similar view last month in her blog series highlighting the region’s “slow march” toward more takeaway constraints. The analyst pointed out that despite Northeast natural gas producers battling stiff headwinds last year — the lower rig count, sub-$1.50 spot prices, lower demand and price-responsive shut-ins in the shoulder periods — gas production volumes still managed to hit record highs in 2020, both for daily output as well as on an annual average basis.
Regional production flows averaged 32 Bcf/d in 2020, up from 31.3 Bcf/d in 2019. Meanwhile, daily pipeline flow data showed volumes sustained year-on-year gains through January 2021.
Nasta said as anomalous as 2020 was, it serves as something of a bellwether for what’s to come for the Northeast gas market. “So what happens when rig counts and production recover in the coming years? How long before pipeline constraints worsen and what are the prospects for new pipeline development?”
The Northeast gas market is apt to see worsening takeaway constraints within five years, according to Nasta, seasonally at first and potentially year-round by the latter part of that time frame. The looming constraints would serve as a clear reminder of the long stretch of pipeline constraints that routinely ballooned regional prices to the teens and $20s.
Wild, Wild West
With the threat of heavy snow and unrelenting cold across the Pacific Northwest in the coming days, prices across the region posted stout gains across the forward curves.
AccuWeather said winter storm warnings were in effect across parts of Oregon and Washington ahead of another round of heavy snowfall as the second of a one-two punch of winter storms took aim at the Pacific Northwest. Seattle was forecast for 4-8 inches of snow, while in Portland, up to 10 inches was possible.
By Sunday, forecasters said precipitation would become lighter and more intermittent as the storm system moves away to the south and east of the area. There could still be some snow, but rain showers were expected as temperatures climb into the middle and upper 30s.
Yet another storm was likely to move in by Monday, though. AccuWeather said with that system, warm enough air was expected to be in place for the precipitation to fall as rain.
With Westcoast Transmission’s Station 2 outage potentially lasting anywhere from two to six weeks, Northwest Sumas March prices jumped 17.0 cents from Feb. 4-10 to reach $2.968, Forward Look data showed. The summer strip (April-October) rose only 5.0 cents to $2.751, while next winter (November-March) tacked on 5.0 cents to $3.370.
The Station 2 outage was triggered by equipment failure, which has reduced its flow capacity by about 250 MMcf/d, according to Wood Mackenzie.
California prices also were strong amid the frosty air moving into the region. Winter weather already has come in chillier than normal, prompting rare storage withdrawals from the Aliso Canyon facility. Wood Mackenzie said Friday that Aliso Canyon had drawn down heavily over the last week, withdrawing a total of 2.57 Bcf.
The threat of even more bitter conditions sent SoCal Citygate prices for March 10.0 cents higher between Feb. 4 and 10 to reach $3.376. The summer strip picked up 7.0 cents to hit $3.838, while next winter climbed 6.0 cents to $4.590.
