Natural gas futures softened on Friday after breaking above the $6,500/MMBtu mark at the start of the trading session. With technical pressure amplified given the lack of demand response to the higher price environment, overbought conditions sent the May Nymex futures contract down 8.1 cents to $6.278. June futures fell 8.0 cents to $6.356.
In short :
- Production is crucial to ease supply worries
- LNG demand could exceed current forecasts
- Spot prices are generally higher in mixed weather
Spot gas prices were mixed to end the week, with NGI’s Spot Gas National Avg. climbing 9.5 cents to $5,995.
After rising more than 30.0 cents on Thursday, it’s no complete surprise that futures have held back a bit heading into the weekend. As weather models converged to show slightly cooler than normal weather during the latter part of April, production took a step forward.
NatGasWeather said most data favors a return to milder demand for the April 22-25 period, but with some risk of cooler trends over time. More importantly, however, the trend ahead should bring enough demand to keep current shortfalls of nearly 300 billion cubic feet from improving through the end of the month. This shortens the window to catch up with the terrain before the summer heat, according to the forecaster.
“This will keep the bottom state relatively bullish and has led to seasonal buying with the expectation that US supply shortfalls will increase over the summer,” NatGasWeather said. “The only way we see the supply scenario improving in the coming months would be if U.S. production increases materially soon.”
The forecaster said there is potential for a significant increase in production. NatGasWeather pointed to the latest data from Baker Hughes Co., which showed an increase of 16 oil and gas rigs for the week ending Friday April 8.
Still, the climb is steep to replenish stocks this summer. On Friday, traders were still digesting the latest storage figures from the Energy Information Administration (EIA). The agency reported a bigger-than-expected inventory decline of 33 billion cubic feet for the week ending April 1. .
Mobius Risk Group pointed out, however, that with a total population-weighted heating degree-day of 3,552, this winter ranked eighth warmest in the past 72 years. Assuming that weather-adjusted (S&D) supply and demand would have remained constant in normal weather, the cumulative withdrawal from storage could have been slightly more than 2.5 Tcf.
“The outlook for a 2.5 ctf pullback next winter, assuming normal weather and flat year-over-year S&D, is a big part of the recent near-term price increase” , said Mobius. “With the start of the injection season below 1.4 Tcf and most market expectations calling for storage construction below 2 Tcf, next winter is expected to start with less than 3.5 Tcf in the ground. “
Unless there is a combination of rapid production growth and/or a series of Liquefied Natural Gas (LNG) export limitations causing hurricanes, the summer injection season could be the worst. one of the records in terms of price in the era of shale, according to Mobius. “We just don’t have enough BTUs nationally, and that’s true for most major economies around the world.”
Renewable energy production could step in to temporarily mask the shortage of molecules this spring, Mobius said. “Mother Nature and her vagaries of delivering high wind speed, sparse cloud cover and precipitation in the eastern United States are factors that could have a noticeable impact on summer prices. However, these risks are currently offset by early spring weather forecasts that keep heating demand at the forefront until mid-April.
Meanwhile, prices could stay higher for much longer. In a note to clients on Friday, a team of Goldman Sachs analysts led by Samantha Dart said news that the United States would send an additional 15 billion cubic meters to Europe this year has grabbed headlines. However, this additional flow could be easily achieved.
“U.S. LNG exports to the region have already been so high year-to-date that volumes could be halved for the remainder of the year and still hit that target,” Goldman analysts said.
More relevant, according to the Goldman team, is the impact of Europe’s efforts to reduce its dependence on Russian energy supplies. Analysts see potential to increase US liquefaction capacity by 3 to 5 billion cubic feet per day beyond their baseline assumptions.
This baseline now includes a phased debottlenecking of Cameron’s existing trains, which would add 4.5 million metric tons/year (mmty) by 2025. It also includes the commissioning of a module (1.4 mmty) at New Fortress Energy Inc.’s Fast LNG project. The project was sanctioned last year and could enter service in 2023.
Quick cash recovery
Like futures, spot gas prices have been on the rise recently, and Friday was no different. Even though prices historically fell before the weekend, cash quickly rebounded from Thursday’s drop.
Gains were largest in the eastern half of the country, where Cove Point gas jumped 31.0 cents to average $6,320 for three-day gas delivery through Monday. Transco-Leidy Line gained 19.5 cents to $5.845, while Algonquin Citygate added 19.5 cents to $6.085.
Smaller increases were seen in the midsection of the country, and parts of Texas saw modest losses amid pipeline work on the El Paso natural gas pipeline. Waha spot gas slipped 4.0 cents to $5.615.
Prices were also generally lower on the West Coast, despite the potential for record heat. The National Weather Service said daytime temperatures are expected to remain 20 to 25 degrees above normal on Friday, reaching the 90s across much of California. Earlier in the week, new heights were reached in Anaheim, Burbank and a host of other Golden State cities.
SoCal Citygate Spot Gas fell 13.5 cents to $5,995, while SoCal Border Avg. fell 11.0 cents to $5.835.