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Natural Gas Futures Bounce Back with Conviction Amid Weak Production and Surging Cash Prices

Natural gas futures on Wednesday rebounded as traders mulled ongoing production outages in the Gulf of Mexico (GOM), robust domestic demand and intensifying competition for U.S. exports of liquefied natural gas (LNG).

At A Glance:

  • Futures easily erased the day-earlier loss
  • Production remained light in Ida’s wake
  • Spot prices soared in the West

The October Nymex contract jumped 34.6 cents day/day and settled at $4.914/MMBtu. A day earlier, the prompt month shed 14.4 cents. November gained 34.7 cents on Wednesday to $4.962.

Spot gas prices rallied for a second day, led higher by surges in the West. NGI’s Spot Gas National Avg. soared 61.0 cents to $5.405 a day after advancing 37.5 cents.

Bespoke Weather Services said forecasts Wednesday showed increased cooling degree days in the eastern half of the nation, adding to already robust demand in the West. The firm said summer-like heat is intensifying “as upper-level ridging flexes its muscle, owing to the La Niña base state, which typically is a warmer/hotter signal at this time of the year.”

[Need daily natural gas pricing? NGI is one of only two price reporting agencies that includes ICE data to determine natural gas price indexes. Find out more about NGi’s Daily Datafeed.]

Total gas-weighted degree days in Bespoke’s forecast for the next two weeks are slightly above the five-year average. This is bullish for natural gas prices because “we have had hot Septembers over the last few years, elevating the five-year average.”

GOM production in the wake of Hurricane Ida, meanwhile, continued to only inch back toward normal. The bulk of GOM output remained shut-in Wednesday, with an estimated 77% of natural gas production still offline, totaling more than 1.72 Bcf/d, according to the Bureau of Safety and Environmental Enforcement.

Overall national output hovered around 91 Bcf at the start of trading Wednesday, more than 1 Bcf below pre-Ida levels due to the lingering shut-ins in the Gulf. While the storm diminished industrial demand for natural gas in the region as well, Wood Mackenzie analyst Kara Ozgen noted Wednesday “initial signs of comeback.”

Citing Department of Energy data, Ozgen said “the number of refineries that remain shut down is now only five.” She said all three refineries in the Baton Rouge area and one near New Orleans have initiated the restart process, although the refiners will not produce at full rates for several days. “In line with this,” she said, “we have seen some industrial meters in the Gulf start to nominate gas over the past few days.”

Given the expected resumption of industrial demand, analysts said the lower output is of greater concern because supply/demand balances were tight prior to Ida and are expected to remain so after the storm’s impacts fade.

At the pace established early this week, EBW Analytics Group said it will take another “28 days for currently shut-in Gulf of Mexico natural gas supply to stage a complete comeback.”

Entergy Corp. said Wednesday it has restored power to about 60% of the more than one million customers in Louisiana and Mississippi that lost service after Ida battered the two states. However, the company said, it may take until late September to fully restore power to all affected customers.

“Once all is resolved,” Bespoke said, “we suspect the supply/demand balance will remain supportive” for gas futures, “as time is running out to get us up to 3.5 Tcf for end-of-season storage.” That is the level the firm estimates would prove sufficient to satisfy strong demand over a long or particularly harsh winter. Currently, the storage trajectory puts the United States on pace for an inventory level closer to 3.4 Tcf, Bespoke projected.

In addition to robust domestic demand through the summer months and into September, demand for LNG feed gas has held near or above 11 Bcf for several days – within striking distance of record levels and helping to soak up U.S. supplies.

European demand for U.S. exports of LNG has been strong for months as supplies on the continent remain low after bitter conditions last winter and a hot summer. Europe is also competing with Asia for U.S. supplies of the super-chilled fuel, supporting higher prices and export volumes.

Against that backdrop, markets will next turn their attention to the U.S. Energy Information Administration’s (EIA) storage report on Thursday.

NGI estimated a 38 Bcf injection into U.S. natural gas stocks for the EIA report, which covers the week ended Sept. 3. That would compare with a five-year average 65 Bcf injection. The year-earlier build for the period is also 65 Bcf.

Injection estimates in a Bloomberg poll landed at a median of 39 Bcf. Predictions ranged from 32 Bcf to 58 Bcf. Results of a Reuters survey, meanwhile, ranged from injections of 32 Bcf to 51 Bcf, with a median build of 40 Bcf.

Last week, EIA reported an injection of 20 Bcf natural gas into storage for the period ended Aug. 27. The result was shy of already modest expectations. Major surveys had pointed to a below-average build in the mid-20s Bcf. The five-year average increase was 53 Bcf.

The latest build lifted inventories to 2,871 Bcf, though that was well below the five-year average of 3,093 Bcf.

In its September Short-Term Energy Outlook, released Wednesday, EIA forecasted fourth quarter 2021 Henry Hub spot prices would average $4.00, a 16% increase from its August forecast. It cited demand strength and storage challenges compounded by Ida.

“Lost production from the storm combined with these current market conditions has limited our ability to build up natural gas inventories, and we expect that will keep prices higher in the short term than we had previously thought,” EIA Acting Administrator Steve Nalley said.

Cash Cruises

Spot gas prices skyrocketed Wednesday, as supply constraints and elevated demand in the western United States spurred a furious rally.

NatGasWeather said vast swaths of the West, along with the southern Plains and Texas, remain very warm to hot this week, with highs of upper 80s to 100s because of strong high pressure.

With lofty temperatures and high energy demand across the western region, the California Independent System Operator on Wednesday asked residents statewide to voluntarily conserve electricity in the afternoon and evening when the grid is most stressed because of higher demand and tighter supplies.

An energy storage facility in Moss Landing, CA, that was forced offline after it overheated and damaged batteries added to natural gas demand and upward price pressure out West.

Owner Vistra Corp. said the problem developed Saturday night at phase 1 of its Moss Landing facility – the larger of two phases there. The facility, which stores excess energy during the day and releases it at night to meet evening demand, remained out of commission at mid-week as Vistra worked to assess the cause of the problem. The facility can power 225,000 homes at peak capacity.

Crews “are in the early stages of this investigation and expect that it will take some time to fully assess the extent of the damage before developing a plan to safely repair and return the battery system to operation,” Vistra officials said in a statement.  

Against that backdrop, physical prices spiked in California. SoCal Citygate jumped $8.495 day/day to average $20.055, while SoCal Border Avg. climbed $6.660 to $15.460.

Prices overall in California reached $27.000 at an intraday peak and averaged nearly $12.000.

Gains were also exceptionally pronounced in the Southwest, where high temperatures continued to eclipse the century mark in Las Vegas and Phoenix. El Paso S. Mainline/N. Baja advanced $16.000 to $28.765, and KRGT Del Pool gained $3.905 to $15.310.

Elsewhere, double-digit price gains were common across the Midwest, South and East as well. Chicago Citygate added 28.0 cents to $4.770 and Algonquin Citygate near Boston picked up 17.5 cents to $4.485.

For the rest of this week, the Midwest and Northeast “are comfortable with highs of upper 60s to lower 80s as early fall-like cool fronts sweep through with scattered showers,” NatGasWeather said. “Heavy rains and gusty winds will spread across Florida and portions of the Southeast Thursday and Friday as a weak tropical system tracks through.”

Much of the Lower 48 will warm above normal this weekend and next week, however, “with highs of 70-80s across the northern U.S. and 80s-90s across southern” regions, the firm added. Looking to next week, the South and West will remain hot, with “highs of 80s and 90s besides locally 100s Southwest.”

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