Natural gas futures rally again despite possibility of record storage injection

Natural gas futures continued higher on Wednesday despite sharply bearish near-term fundamentals, including the potential for a record low storage injection. After hitting an intraday high of $7.022/MMBtu, the November Nymex gas futures contract settled at $6.930 on Wednesday, up just 9.3 cents per day. December futures rose 6.2 cents to $7.236.

In short :

  • Storage injection of more than 100 Bcf at the tap
  • End of October cold seen possible
  • Weather systems generate cash gains

Spot gas prices also continued to strengthen as the East Coast braced for an early season cold snap. NGI’s Spot Gas National Avg. picked up 81.0 cents to $6,005.

After two days in the green for Nymex futures despite weak fundamentals, Vortex Commodities CEO Brian Lovern told NGI the rally could be tied to macro buying in the energy complex. He noted gains in oil prices, as well as the Energy Select Sector SPDR (XLE) fund. The XLE Index is considered a representation of the energy sector of the S&P 500 Index.

“That purchase probably also fueled natty and helped the move,” Lovern said.

The trader also noted that there had been market talk related to the return of Freeport LNG. While that would support gasoline prices, “nothing they said could be trusted so far.”

The liquefied natural gas terminal has been out of service since early June following a fire. Management initially said the facility would return to partial service in October, but later pushed the schedule back a month. Full operations would not take place until March.

Cove Point LNG is also down for planned maintenance, with supplies not being delivered to the two export facilities available for storage.

Are record injections in sight?

After a slow pace of rebuilding throughout the summer, the gas market has been able to ramp up resupply now that temperatures have dropped from record lows. Although pockets of heat persist in Texas, and at times across the West, recent government inventory data has indicated a much improved trajectory over the final weeks of traditional injection season.

Lovern said after back-to-back triple-digit storage builds, inventories looked “almost a lock above 3.5 Tcf” at the end of October.

“Chances are that we will be fine this winter, because we will need a lot of cold for major problems,” he said. “But of course it’s not done yet.”

The gas market is rapidly approaching the time of year when the weather begins to “drive the bus”, according to the trader. “October so far doesn’t look as hot/bearish as everyone expected. Obviously it’s only October, but it gets very interesting if this trend continues.

In the shorter term, Lovern is unsure whether the recent price rally is sustainable. After all, the next two numbers from the Energy Information Administration (EIA) “just look huge,” and an even higher injection is possible if the scratches are confirmed. He pegged Thursday’s construction at 125 Bcf.

Other estimates ahead of the next EIA report were widely varied, indicating a lack of clarity about how much near-record supply is ending up in storage.

A Bloomberg survey of seven analysts produced a range of injection estimates from 95 Bcf to 129 Bcf, with a median build of 125 Bcf. Reuters polled 15 analysts, whose estimates ranged from injections of 94 billion cubic feet to 131 billion cubic feet, with a median forecast of 111 billion cubic feet.

The EIA recorded construction of 114 billion cubic feet in the same week a year ago, while the five-year average stands at 87 billion cubic feet.

Total working gas in storage as of September 23 was 2.977 billion cubic feet, 180 billion cubic feet below year-ago levels and 306 billion cubic feet below the five-year average.

Ahead of the next EIA report, which would represent balances for the current week ending October 5, Mobius Risk Group has highlighted a key fundamental that could impact gas demand – and therefore storage.

Wind generation was weaker in Texas, with the Electric Reliability Council of Texas (ERCOT) showing that wind generation peaked at just under 12 GW on Tuesday and bottomed out at 2.5 GW.

“This is significantly lower than ERCOT’s average wind generation over the past several weeks, and therefore gas power is likely to fill the void for lower wind,” said Zane Curry, analyst at the gas at Mobius.

The analyst noted that the drop in wind generation is expected to occur just as the Lone Star State heats up for the rest of the week. Highs in Houston are expected to climb back to 90 by Friday, about 10 degrees higher than last week.

Soaring spot prices

Spot gas prices jumped above $6 — or very close — in the majority of U.S. locations during Wednesday’s trading.

Price gains from the southeast to the eastern seaboard continued to be driven by a stagnant upper level low that produced windy conditions and cool overnight temperatures in those regions. The National Weather Service (NWS) said the cooler-than-normal weather was expected to continue, with cool fall air pushing south from the west side of the system in Alabama and Georgia.

With power restoration efforts largely complete in Florida and other areas affected by Hurricane Ian, increased demand for gas was reflected in spot prices. Next-day gas from Florida Gas Zone 3 jumped 74.5 cents on the day to an average of $6,460, and Transco Zone 5 edged up 93.0 cents to $6,415.

Most East Coast sites traded around 60.0 cents or so, but in the pipeline-constrained New England market, Tenn Zone 6 200L jumped 77.5 cents to $6,100.

NWS forecasters said mostly comfortable midweek temperatures in the Midwest are expected to give way to a strong cold front pushing rapidly south across the northern plains and into the region. High temperatures behind the front in the northern plains, upper Mississippi Valley and upper Great Lakes are expected to dip 20 to 25 degrees in the mid-40s to low-50s. Freezing morning lows would follow Friday morning , with widespread below-freezing temperatures across the region. Parts of North Dakota and Minnesota can dive into the mid-20s.

“This front will continue south and east on Friday, becoming the dominant temperature story in the forecast ahead,” NWS said. “Lake effect showers are also forecast for the upper Great Lakes.”

On the price front, Defiance spot gas rose $1,005 a day to average $6,080, while NGPL Midcontinent took 64.5 cents to average $5,705.

Locations in Louisiana rallied strongly mid-week amid rising temperatures and rebounding cooling demand. Henry Hub rose 65.5 cents to $6,055 and Transco Zone 3 rose 93.0 cents to $6,200.

More substantial price gains were seen on the West Coast amid upstream pipeline constraints on El Paso Natural Gas (EPNG).

Wood Mackenzie said the pipeline declared a force majeure on the 1300 line, essentially cutting capacity in half at Capock N in Lea County, NM. From Tuesday’s intraday cycle 1, operational capacity has been reduced by 313,882 MMBtu/d, to 307,818 MMBtu/d, resulting in a reduction in throughput of 183,144 MMBtu/d on Tuesday’s gas day compared to the day gas Monday.

In the last 30 days prior to the force majeure declaration, Wood Mackenzie said westward flows through Caprock N averaged 489,932 MMBtu/d and peaked at 532,244 MMBtu/d. This force majeure was declared due to an anomaly downstream of the Bluewater Compressor Station, and EPNG has not yet provided an end date.

Given declining westbound flows, SoCal Border Avg. spot prices jumped $1,260 a day to an average of $7,440.

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