With stifling heat and high humidity spreading across the Eastern Seaboard this week, natural gas forward prices across New England raced higher with pipelines tapped out and unable to move additional supply to the region.
Fixed prices for August soared $1.86 for the trading period through Wednesday (July 21) to reach $8.236/MMBtu at the Algonquin Citygate, according to NGI’s Forward Look. Even more telling of the dire situation, Algonquin August basis prices jumped 45.0 cents to plus 22.9 cents. For comparison, the vast majority of North American markets saw basis prices shift no more than a nickel for August.
Prices were strong throughout the remainder of summer, with September fixed prices edging up $1.50 to $7.433 and the August-October strip climbing $1.64 to $7.760, Forward Look data showed. Price increases for the upcoming winter were more in line with the rest of the country, up $1.260 on the week, but at $30.106 stood at a stout premium to the $7 and $8 handles seen elsewhere.
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“The heat wave will be the most formidable of the summer so far for many big cities along the upper reaches of the Eastern Seaboard,” AccuWeather senior meteorologist Alex Sosnowski said. “The intensifying weather pattern will also deliver some of the highest daily temperatures and longest stretches of heat that many places have endured in years.”
Daytime temperatures in Boston were expected to top 90 degrees through the weekend, at least, according to AccuWeather. Triple-digit highs were not out of the question. Beantown hit 93 on Tuesday, 92 on Wednesday and had already hit 91 by noon on Thursday.
The sweltering heat resulted in even stronger prices at Iroquois Waddington, in New York. August fixed prices were up $1.810 on the week to $8.556, according to Forward Look. Basis, meanwhile, was up 41.0 cents to plus 54.9 cents.
Beyond the prompt month, September fixed prices rallied $1.390 to hit $7.603, while the balance of summer rose $1.520 to average $7.920. The winter strip picked up $2.630 to average $25.707.
Notably, the Calendar Year 2023 strips at both Algonquin and Iroquois sat Wednesday above $10, at $13.60 and $11.760, respectively.
Continued Storage Woes
Premiums once reserved for the cold, dark days of winter have become common this summer anytime the mercury rises. Aside from the impacts of rising cooling demand, the backdrop of inadequate storage continues to weigh on the market.
On Thursday, the latest government inventory data signaled a small step in the right direction. The Energy Information Administration (EIA) reported a larger-than-expected 20 Bcf injection into East inventories for the week ending July 15. However, at 521 Bcf, East stocks remain 11% below the five-year average.
Inventories across the country have struggled to regain ground following a steep winter drawdown, unusually hot weather that’s prevented heftier injections and lagging production growth.
The EIA said Midwest stocks rose by 22 Bcf to 608 Bcf, but this level is still 9% below the five-year average. Even more worrisome, the South Central region recorded a net 16 Bcf withdrawal for the week ending July 15, pushing stocks down to 874 Bcf. This is more than 14% below the five-year average of 1,023 Bcf.
Total working gas in storage rose to 2,401 Bcf, which is 328 Bcf below the five-year average, according to EIA.
Given the widespread heat blanketing the Lower 48, early estimates suggest a net withdrawal cannot be ruled out for the next EIA report. However, NatGasWeather meteorologist Rhett Milne said winds have been stronger week/week, which should reduce the amount of gas needed for power generation.
Nevertheless, Thursday’s bullish EIA figure made its mark on gas prices. The August Nymex futures contract, which traded to an intraday low of $7.606, rallied to a $8.176 high following the EIA report. Bears stepped back in, however, and sent the prompt-month contract back to $7.932 at the close.
Continued Bullish Momentum
Looking ahead, EBW Analytics Group cautioned that the odds for a hot August are high as well. Forecaster DTN’s preliminary most-likely outlook suggests record-breaking August heat at 385 cooling degree days. At the same time, while EBW anticipates production moving higher later this year, the bulk of supply gains may not be likely until the autumn.
“By early fall, from a storage perspective, rapidly depleting South Central salt storage – following repeated larger-than-normal draws throughout the first half of summer – will eventually lead to operators looking to replenish inventories ahead of the upcoming winter heating season,” EBW senior analyst Eli Rubin said.
Furthermore, speculators that have exited the market en masse during the first half of the year may be drawn back in by the prospect of tremendous upside price potential, according to Rubin. The analyst said multiple factors would need to fall into line, but it is not difficult to construct a highly bullish scenario over the next 30-45 days. After all, the end-of-October storage target has fallen nearly 100 Bcf since July 4 amid searing heat, rising demand and soft production. This effectively puts stocks on pace to reach only 3,425 Bcf by Oct. 31.
“A wide range of potential storage trajectories remain possible, of course, with tremendous outstanding uncertainty surrounding weather outcomes, Freeport LNG’s anticipated return, hurricane season and the market awaiting production to arrive,” Rubin said.
However, EBW said the risk of extreme outcomes has narrowed since last month. The firm currently estimates only a 3% chance of storage falling below 3,000 Bcf. Conversely, storage still has a 21% chance of exceeding the five-year average for the end of October at 3,636 Bcf.
Although winter shortage scenarios appear relatively unlikely at present, Dutch Title Transfer Facility futures are trading near $50/MMBtu as a reflection of upside risks in an extreme tail risk scenario. Europe is bracing itself for a supply shortage this winter amid the continued fallout of Russia’s invasion of Ukraine. Although gas started flowing again on Nord Stream 1 on Thursday, flows could be cut further if key equipment is not returned by next week.
In the meantime, U.S. liquefied natural gas export facilities have been running near maximum capacity to help Europe replenish its storage inventories. The European Union also rolled out a plan Wednesday to reduce natural gas demand among all consumers by 15% through next spring. The bloc is also requiring that storage inventories be filled to 80% of capacity by Nov. 1.
“If a large supply outage or frigid start to the winter increases the odds of a shortage, extreme upside for Nymex futures could rapidly become more realistic than present conditions indicate,” Rubin said.