With Starbucks’ pumpkin-spice lattes in hand, natural gas traders sent forward prices plummeting as crisp air began moving into the country even as Texas continued to bake under triple-digit temperatures. October forward prices fell by an average 30.0 cents from Aug. 31-Sept. 6, with West Coast markets leading the way as losses there were more than double that amount, according to NGI’s Forward Look.
The sharp sell-off extended through the upcoming winter (November-March) as prices dropped an average 24.0 cents through the period, Forward Look showed. Prices for next summer (April-October) were down only 9.0 cents on average, however.
For most U.S. markets outside of the West, the price swings lower across the forward curve came as weather models showed more moderate temperatures arriving by this weekend after a heat wave boosted natural gas demand this week in regions where heat has largely been absent this summer.
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In Texas, a more significant drop in temperatures is expected about a week from now, as the state’s electric grid operator came this close to losing stability of the grid on Wednesday evening amid the stifling heat.
ERCOT Avoids Blackouts (Barely)
Temperatures have steadily hit the low 100s in the Lone Star State over the past month, but Wednesday marked the first time this summer that the Electric Reliability Council of Texas (ERCOT) had to move to the second level of its tiered emergency procedures. The last time it moved to energy emergency alert 2 (EEA2) was during Winter Storm Uri in 2021.
ERCOT said the EEA2 was issued because of a combination of dropping operating reserves and frequency. Frequency of the entire ERCOT grid must be maintained between 60.1hz and 59.9hz at all times.
“High demand, lower wind generation and the declining solar generation during sunset led to lower operating reserves on the grid and eventually contributed to lower frequency, which precipitated the emergency level 2 declaration,” ERCOT CEO Pablo Vegas said.
To protect the grid, ERCOT brought all available generation online, released remaining reserves, and used demand response to lower electric demand. It also worked with out-of-state independent system operators and market participants to obtain additional power generation capacity. Additionally, ERCOT obtained Texas Commission on Environmental Quality enforcement discretion, which allows a generator to extend its service/run-time/operations to help meet demand, if needed, to maintain grid reliability.
The grid operator set a new September peak demand record of 82,705 MW on Wednesday. Last September, the highest demand recorded was 72,370 MW.
On Thursday, ERCOT issued another public conservation appeal for 5-9 p.m. CT. A weather watch also was in place through Friday.
Still, with more seasonal temperatures in the 80s and 90s likely beginning next week, forward prices at the Houston Ship Channel tumbled, according to Forward Look. October forwards were down 29.0 cents from Aug. 31-Sept. 6 to reach $2.196, while the winter strip fell 18.0 cents to $3.357. Summer 2024 prices averaged 8.0 cents lower at $2.930.
Underestimating Market Tightness?
Those price declines were similar to those seen at benchmark Henry Hub, where the near-term weakness in the curve reflected the host of bearish factors currently weighing on the market.
In addition to the seasonal dip in demand resulting from cooler weather, LNG demand continued to lag earlier highs. Part of this is because of operational limits at liquefied natural gas export facilities when temperatures reach such high levels. Likewise, some Gulf Coast LNG terminals also have undergone maintenance this summer.
With weather conditions set to cool, feed gas deliveries theoretically should begin to rise. However, fall turnarounds stand to keep LNG demand in check. Cove Point, for example, usually goes offline for about three weeks every September.
Production, meanwhile, has remained relatively strong outside of maintenance events, and a string of supportive storage data thus far hasn’t materially swayed prices higher.
The latest inventory stats maintained a bullish undertone. The Energy Information Administration (EIA) said stocks for the week ending Sept. 1 increased by a much smaller-than-expected 33 Bcf.
Once again, nonsalt facilities in the South Central region caught the market off guard with a 6 Bcf withdrawal. Salts withdrew 8 Bcf.
Hot weather and low wind generation were the likely culprits for the continued pull on natural gas stocks in the South Central region, according to traders and market observers on energy chat Enelyst. Still, others thought there may be more to the story.
“We saw the heat and low wind, but even my lowest number was 38,” said independent weather forecaster Corey Lefkof.
Elsewhere across the Lower 48, Midwest stocks rose by 24 Bcf and East by 15 Bcf, according to EIA. The Mountain region added 5 Bcf, while the Pacific added 4 Bcf. Notably, Pacific stocks are now less than 5% below the five-year average and about 6% above year-earlier levels.
Total working gas in storage as of Sept. 1 rose to 3,148 Bcf, which is 462 Bcf higher than last year at this time and 222 Bcf above the five-year average.
Mobius Risk Group noted that the net 33 Bcf inventory build was the smallest late-August injection since 2016. However, the continued confirmation of market tightness, or undersupply, remains an “afterthought” for the market, according to the firm. Instead, traders remain more focused on the potential for supply growth heading into winter.
“End-of-season estimates continue to drift lower, but the market is presently convinced that tight supply/demand this summer will not transfer to withdrawal season,” Mobius senior analyst Zane Curry said.
Meanwhile, Curry pointed out that with the Henry Hub winter 2023-2024 strip at around $3.40 and the summer 2024 strip at $3.20, there is little risk premium currently baked into the peak heating season. A warm start to the winter could further compress these two seasonal strips, however, basis markets across the Lower 48 still hold “material” winter summer premiums, according to the analyst.
“Instead, it could be these markets which bear the brunt of a mild start to withdrawal season,” Curry said. “On the other hand, if winter starts out colder than normal, and underlying balance tightness does not immediately dissipate once the fall shoulder ends, it would not be surprising to see a pronounced positive change in the remaining winter months’ value relative to the summer 2024 injection season.”
Improved West Coast Supply
A slew of developments in California and across the broader Western United States has dramatically weighed on prices in the region in recent weeks.
The sell-off continued during the Aug. 31-Sept. 6 period as a pattern of mostly mild to warm weather was expected to blanket the region in the next few days before even cooler weather moves in thereafter.
Even with bouts of summer heat, the steady replenishment of storage inventories in the Pacific region has vastly improved the supply outlook for the region. Likewise, regulatory decisions aimed at taming volatility this winter also have given the market greater confidence in meeting demand, all the while pushing down prices from the extreme highs that began last summer and escalated to record levels over the winter.
NGI historical data show SoCal Citygate prices averaging $15.870 on Sept. 1, 2022, and then soaring to an average $49.670 on Dec. 13.
As for forward prices, the SoCal Citygate October contract plunged 92.0 cents through the period to reach $4.749 on Wednesday, Forward Look data show. The winter strip dropped 79.0 cents to $7.425, and the summer 2024 strip fell 26.0 cents to $4.830.
“Southern California typically hits peak summer heat from July through September,” NGI’s senior price analyst Josten Mavez said. “There have been a few heatwaves so far, but nothing like we’ve seen throughout the Midwest and even on the other side of the coast. As we near the end of summer, it seems California has been mostly spared, especially given that last year was one of the hottest on record.”
Supply basins serving the West Coast markets also softened. In the Rockies, Northwest Rockies October was down 60.0 cents through the period to $2.906. The winter strip dropped 64.0 cents to $6.108, and the summer 2024 strip slipped 16.0 cents to $3.340.In the Permian Basin, Waha fell 39.0 cents to $1.591 for October and 21.0 cents to $2.950 for the upcoming winter, Forward Look showed. Summer 2024 prices averaged 10.0 cents lower $2.470.
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