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A glimpse of mid-November cold in updated forecasts, offering a potential momentum shift for a natural gas futures market weighed down by bearish weather sentiment, sparked a sharp rally in early trading Monday. The December Nymex contract was up 61.0 cents to $6.294/MMBtu at around 8:55 a.m. ET.
The December natural gas futures contract on Friday floundered in its first session as the prompt month amid light demand, strong production and forecasts for plump storage injections.
December Nymex gas futures settled at $5.684, down 19.1 cents day/day. January fell 18.3 cents to $5.953.
NGI’s Spot Gas National Avg. shed 35.5 cents to $4.345.
“The most important driver of Nymex gas…is overwhelming warmth enveloping the eastern two-thirds of the country through mid-November,” said EBW Analytics Group’s Eli Rubin, senior analyst.
Citing DTN forecasts, he said gas-weighted heating-degree days could fall 75 below normal between late October and the middle of next month. “If the current weather pattern continues, it may be difficult to sustain an average December-February strip” near $6.00/MMBtu.
NatGasWeather said Friday that its forecast also continued to point to light heating demand through the end of October and into the first half of next month. The firm said it may take until late November or early December for widespread cold to develop over the northern and eastern Lower 48.
“And if it fails to by then,” the firm added, “there will be little supply concerns for the U.S. this winter season, barring sustained Arctic cold.”
Production, meanwhile, hovered around 101 Bcf/d Friday, according to Bloomberg, keeping output near the record high it reached early this month and feeding expectations for robust storage increases into November.
The Energy Information Administration (EIA) on Thursday reported a lower-than-expected 52 Bcf injection into Lower 48 storage for the week ended Oct. 21. The build left stockpiles at 3,394 Bcf, or 197 Bcf (minus 5.5%) below the five-year average.
Brief bouts of cold and some temporary maintenance issues impacted the latest print. But with benign weather on the horizon and output again near all-time highs, analysts are looking for an injection around 100 Bcf with the next EIA print. Over the past six inventory reports, EIA posted a triple-digit storage increase five times.
Analysts at The Schork Report said Friday bears “shrugged off” the latest inventory update “in anticipation of another monster” build with the next Thursday’s storage report.
What’s more, analysts expect that production levels will remain elevated through next year.
BTU Analytics’ Erica Black, manager of energy fundamentals, predicted 2023 annual average gas production would increase 3.7 Bcf/d. “But 2023 is limited on demand growth and will lead to an oversupplied market,” she said.
Tudor, Pickering, Holt & Co. (TPH) analysts said that, while the latest EIA print was relatively light, it still implied loose market conditions.
“On a weather-adjusted basis, we estimate the market was 4 Bcf/d oversupplied versus more than 5 Bcf/d oversupplied in the week prior,” they said.
The TPH team said that, on the demand side, “it’s been a tale of negative revisions to the degree day outlook as, per our data, November estimated degree days have fallen from the roughly 550 range in mid-October to less than 500” as of Thursday.
This would place November degree days well short of the 10-year average of 592 and the five-year average of 602, according to the firm. “Old Man Winter will need to enter the fray as we trend toward December or we’d expect further pressure” on prices, the TPH analysts said.
The specter of an economic downturn provides another threat. Commercial and industrial gas demand often tapers during recessions.
U.S. gross domestic product grew at an annualized rate of 2.6% in the third quarter, the U.S. Bureau of Economic Analysis reported Thursday. But the broad measure of economic health had contracted in the two previous quarters, and analysts anticipate headwinds could intensify late this year and early next. This is because high interest rates, driven by the Federal Reserve to combat 40-year-high inflation, are pushing up credit costs, curbing spending and slowing overall economic activity.
“Most of the growth downside is still ahead,” analysts at BNP Paribas said.
Mortgage rates, for example, have more than doubled this year, slowing home sales and darkening consumer sentiment, said Sam Khater, Freddie Mac’s chief economist. The 30-year fixed-rate mortgage averaged 7.08% over the past week, hitting the highest level in 20 years, he said.
“As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence,” Khater said.
Cash prices cruised lower Friday, hampered by the same supply/demand developments that weighed on futures as well as the customary lull heading into the weekend.
NatGasWeather said that, over the weekend and through the trading week ahead, the southern and eastern United States were expected to see comfortable highs of 60s to 80s, while seasonally mild temperatures were projected for much of the Upper Midwest and West.
“National demand will be very light,” the firm said. Looking to the second week of November, the eastern two-thirds of the Lower 48 “will be warmer versus normal as high pressure rules,” extending the stretch of light heating demand.
Prices dropped in nearly every region of the country. Henry Hub shed 35.0 cents day/day to average $4.945, while Chicago Citygate lost 48.5 cents to $4.460 and Algonquin Citygate near Boston dropped $1.085 to $3.690.
Maintenance projects over the past week on pipelines connecting the Permian Basin to key destinations in Texas continued to weigh on prices there, given the repair work prevented takeaways and backed up supplies. West Texas prices recovered ground late in the week as much of the work culminated, but they remained low Friday after plunging into negative territory early in the past week.
Waha and El Paso Permian both gained more than $2.000 Friday, yet each remained more than $1.00 below the national average. El Paso Permian averaged $3.010 and Waha $3.125.
“These maintenance events sent Permian natural gas prices plummeting,” analysts at East Daley Analytics said. They said the extreme volatility “should be temporary as pipelines return to full service” in the week ahead. But the developments of the past week amplified the infrastructure limitations in the basin that could again be exposed when future unplanned repair work is needed. This could worsen if production continues to grow as forecast.
“We see much bigger structural issues on the horizon,” the East Daley team said.
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