Natural gas forward prices remained largely range bound in mid-July, but blazing heat out West led to huge, double-digit gains in the region for the rest of summer. Still, with a persistently large storage surplus and lackluster cooling demand across most of the rest of the country, August fixed prices averaged a moderate 11.0 cents higher for the July 13-19 period, according to NGI’s Forward Look. The balance of summer (August-October) picked up an average 10.0 cents.
Gains were smaller further out the curve, with the winter strip (November-March) tacking on only 2.0 cents on average and prices for next summer (April-October) slipping 2.0 cents on average, Forward Look data showed.
The mostly sideways forward price action in the United States is a reflection of the ongoing battle between hefty supplies and robust demand.
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On one hand, a relatively mild winter outside of the West kept gas inventories at seasonally strong levels heading into the injection season. What’s played out this summer has been more of the same, with the only significant heat relegated to Texas, California and the Desert Southwest.
The result: a hefty 1.14 Tcf injected into underground storage as of July 14, which is higher than both the year-ago build and the interpolated five-year mean, according to The Schork Group.
Not surprisingly, the robust level of storage stocks has weighed considerably on prices.
Benchmark Henry Hub, for example, stood at only around $2.600 for the remainder of summer, Forward Look data showed. There has been some upward momentum further out the curve, however, with the winter 2023-2024 strip averaging at $3.456 for the July 13-19 period and the summer 2024 strip averaging at $3.220.
High Prices In The West
Volatility, though, is alive and well across the West, and the sizzling temperatures in the region make that no surprise.
AccuWeather said a heat dome has led to consistent triple-digit temperatures across a large swath of the Southwest since June, with little relief in sight. Instead, the forecaster said the dome would increase in size and intensity over the next week or so, bringing record-setting heat to millions more people.
Until then, the Desert Southwest is forecast to continue to roast into the weekend. Phoenix may add to its record-setting streak of high temperatures at or above 110 degrees, according to AccuWeather. After that, the Rockies and much of the central United States, which have experienced only intermittent hot spells this summer, are expected to bake under more consistent heat into next week.
“Little sustained relief from the heat is in the forecast for the next few weeks, as the heat dome, driven by strong high pressure, continues to show staying power into at least the early part of August,” AccuWeather senior meteorologist Bill Deger said. “The seasonal monsoon, which traditionally provides relief from the summertime heat in the Southwest, could be delayed or weaker than usual.”
The scorching heat lifted prices across western U.S. forward curves.
Northwest Rockies August forward prices climbed 51.0 cents from July 13-19 to reach $3.522, and the balance of summer jumped 38.0 cents to $3.250, according to Forward Look. The winter 2023-2024 strip maintained that momentum with a 38.0-cent climb of its own to $5.733, while prices for next summer settled back at $3.110.
Similar gains extended into Malin and further south into California.
At the PG&E Citygate, August prices were up 42.0 cents through the period to $4.949, while the balance of summer edged up 40.0 cents to $4.800. Winter 2023-2024 prices, meanwhile, tacked on 26.0 cents and averaged a stout $6.254. The summer 2024 strip was up 5.0 cents to $4.520.
SoCal Citygate snagged the largest price increases, with August soaring to $5.892 and the balance of summer hitting $5.400. Winter 2023-2024 climbed 32.0 cents to $7.769, while summer 2024 prices slipped 3.0 cents to $4.960.
Despite the sweltering conditions across Texas, a different story played out for prices there.
Forward prices from the Houston Ship Channel over to Agua Dulce in South Texas held firmly in the low $2.400 range for August and the balance of summer, according to Forward Look. Prices are seen above $3.00 for the upcoming winter, coming in at around $3.400 across the state. Summer prices are at around $3.000.
The Schork team noted that while overall gas-fired electric generation fell over the past week, Texas has proved to be a glaring exception.
Calling the weather from Texas through Southern California “hot as volleyballs,” the Schork analysts said power burns in the coastal region of the Electric Reliability Council of Texas (ERCOT) jumped by 9.2% to the third-highest levels, 418 GWh, of the past four years.
“Considering that electric power consumption of natural gas in Texas is 4.5 times greater than Arizona and 2.5 times greater than California, A/C demand throughout ERCOT is the primary driver in demand for cooling molecules,” the Schork team said.
Smaller Storage Injections
With little respite from the oven-like temperatures in the foreseeable future, the market continues to look for significant changes on either the supply or demand side.
Storage may be where they find those changes. Injections, while plump, are trending lower heading into the peak of the summer season.
On Thursday, the Energy Information Administration (EIA) said stocks for the week ending July 14 rose by only 41 Bcf. This compared with last year’s 35 Bcf injection in the same period and the 45 Bcf five-year average build.
Market expectations clustered around an injection in the 40s Bcf, though some projections were as high as 58 Bcf. NGI’s model nailed it.
The Midwest led with a 17 Bcf increase to regional stocks, but notably, it was the only one to report a double-digit increase, according to EIA. East inventories rose by only 8 Bcf, the Pacific by 7 Bcf and the Mountain by 6 Bcf.
The South Central reported the smallest rise in stocks, coming in with a net 3 Bcf injection, EIA said. Salt facilities withdrew 2 Bcf.
Total working gas in storage as of July 14 stood at 2,971 Bcf, which is 575 Bcf above year-ago levels and 360 Bcf above the five-year average, according to EIA.
Enelyst managing director Het Shah said the next few weeks should be interesting with more heat in the forecast. Hurricane season also may intensify next month. In discussing the persistent heat dome in place, Shah told participants on the energy chat that a tropical system may be what’s needed in order to push out the stubborn heat.
To that end, Tropical Storm Don continued to meander in the central Atlantic Ocean, although it remained well away from the Lower 48. The National Hurricane Center said maximum sustained winds were near 50 mph Thursday afternoon with higher gusts. Slight strengthening is possible during the next day or so, followed by little change in strength through Saturday.
“Otherwise, the tropics remain quiet,” NatGasWeather said.
As for the potential for widespread heat to continue into August, fluctuations in recent weather data have kept traders on high alert. NatGasWeather said demand should remain “very strong” next week as scorching temperatures continue from California to Texas, but also across the South, Southeast and Florida. The East Coast also is expected to see daytime highs soar into the upper 80s to mid-90s.
“Much of the weather data currently forecasts an impressively hot U.S. pattern for the last week of July into the start of August, although that’s quite far out and where there’s potential for cooler trends in time,” NatGasWeather said.
Bigger picture, the firm noted that even with some uncertainty still in the forecast, it’s likely that the net result of recent and coming weather patterns is for surpluses to decrease only slightly after the next two EIA reports are accounted for. There is the potential for the overhang to “decrease at a faster clip if impressive heat in late July and early August were to finally come through.”
Is Production Finally Falling?
With storage surpluses likely to remain firmly intact this summer, the market continues to wait for production to finally respond to the sub-$3.00 pricing environment that has materialized over the past few months.
Throughout the spring and parts of the summer, production has shown signs of easing. Output at times has fallen to around 98 Bcf/d, off from levels north of 102 Bcf/d a few months ago. However, those declines ultimately proved to be the result of pipeline maintenance rather than any indication of a slowdown on the supply front. It appears that a similar trend is playing out this week.
Wood Mackenzie on Wednesday noted a substantial day/day decline in production, concentrated in Northeast Pennsylvania. In that region, output dropped a hefty 1.2 Bcf/d as receipts fell at the Chapin, Carverton and Puddlefield receipt points on the Transcontinental Gas Pipe Line Co. (Transco) system.
Wood Mackenzie said Transco continues maintenance on the 24-inch diameter Penn Leidy Line A at the “top of the diamond.” This maintenance event began July 5 and is scheduled to conclude on Friday.
Nevertheless, EBW Analytics Group maintained that a supply response to the low prices is coming. It pointed out that production typically responds on around a six- to nine-month lag, rather than an instantaneous reaction to the latest shifts in the forward curve. Natural gas prices initially halved from above $6.00 in December 2022 to the low $3.00 level in January – six months ago.
“If the traditional six- to nine-month lag holds, supply growth could wane over the next 90 days,” EBW senior energy analyst Eli Rubin said.
Though not yet showing up in actual pipeline data, there are multiple signs pointing to decreased output growth ahead, according to EBW.
The firm noted that the Baker Hughes Co. gas-directed rig count is off 27 rigs (down 17%) from January highs. The majority of declines have occurred in the price-sensitive Haynesville Shale, with the bellwether shale play off 24 rigs (down 35%). Haynesville completions also are off sharply through June, according to EBW.
The firm added that Appalachia Basin supply remains constrained, while the Permian Basin lacks sufficient pipeline export infrastructure to sustainably boost output until the 0.5 Bcf/d Whistler Pipeline expansion comes online early fall, increasing odds of softening supply nationally.
Finally, EBW pointed out that the EIA’s latest Drilling Productivity Report (DPR) reflected declining Lower 48 output, which Rubin found “captivating.” He also noted the DPR does not include sliding non-shale output, further dragging on production.
“Any potential tropical shut-ins heading into the heart of hurricane season could similarly weigh on supply,” Rubin said.
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