As natural gas traders in the western United States braced for higher demand, prices throughout the rest of the country continued to erode during the five-day Dec. 2-8 trading period, NGI’s Forward Look data show.
January fixed price trades for delivery at Henry Hub fell 44.3 cents week/week to $3.835/MMBtu, and most Lower 48 hubs posted discounts of a similar magnitude for the period. Notable exceptions to the broader downtrend were concentrated along the West Coast, particularly in the Southern California and Pacific Northwest markets.
December has brought with it a markedly different outlook for winter Nymex futures prices, as the bullish pre-season outlook has thus far turned to bearish reality, a fact that has reverberated throughout the North American market. The January Nymex contract was trading in the mid-$5 range as recently as late November, but it was languishing well shy of the $4 mark as of Thursday.
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‘Normal’ Winter Out The Window?
Amid notably below-normal heating degree day (HDD) totals for this month, “hope for a normal, let alone cold, winter apparently went out the window after Thanksgiving, as did our $5.50 January-February 2022 price view,” Energy Aspects said in a recent research note. “But winter is not over. While half of the past 10 Decembers have been milder than normal, only two of those milder months led to a mild January.”
The anticipated decrease in the December withdrawal rate on milder weather, combined with higher production, led Energy Aspects to revise lower its price forecast.
Lower 48 production outperformed the firm’s projections by 1.2 Bcf/d month/month in November.
“Production growth into December, even with our forecast net of freeze-offs for relatively flat sequential balance-of-winter production, has added nearly 100 Bcf to our end-March 2022 inventory estimate compared to the pre-season forecast,” Energy Aspects said. “We believe much of the early season production surge is due to new wells being tied in and related high initial production rates” from drilled but uncompleted (DUC) wells.
“There is now a greater risk of DUC exhaustion leaving limited firepower for more production growth until rigs are added, which also underpins our slightly above-market summer 2022 forecast,” the firm added. “Importantly, we forecast the production peak in November will not be reached again, perhaps until February 2022, even excluding the risk of freeze-offs.”
Storage Lagging Five-Year Average
Meanwhile, the net 59 Bcf withdrawal from Lower 48 stocks in the latest Energy Information Administration storage report lagged the five-year average withdrawal rate and more or less validated market consensus on the supply/demand balance.
The print “does reflect balances that remain rather tight, and point our model to an end-of-season storage level under 1,500 Bcf, assuming normal weather beyond day 15” of the projection period, Bespoke Weather Services told clients Thursday. However, the storage trajectory would bend upward “if this warmer pattern persists, of course,” the firm added.
Model runs heading into Thursday’s trading kept the pattern on track to deliver the second warmest December on record behind only December 2015, according to Bespoke.
“We are still watching for changes late month that could at least give us a step change closer to normal, as upper level ridging builds toward Alaska in response to changes in tropical forcing, though best risks for cold should this pan out look to be in the western and central U.S.,” Bespoke said. “Nonetheless, that can still be enough to halt the high-end warm pattern on the national level.”
Europe Still Squeezed
Meanwhile, Europe remains in a far more precarious supply situation, Rystad Energy senior analyst Wei Xiong said in a recent note.
“Bouts of cold temperatures and stable but weak flows from Russia to Western Europe have resulted in an accelerated drawdown of European storage by 4.5% on the week, higher than the 4% withdrawal observed the week before,” Xiong said. “As a result, storage now stands at only 70% of capacity. Europe risks a withdrawal to between 12-20% of notional capacity by April 2022, which may sustain restocking demand and support” Dutch Title Transfer Facility “prices into the second quarter of 2022.
“That said, cold snaps have been somewhat inconsistent, and weather expectations are now slanted towards a sporadically cold rather than a sustainedly cold winter,” the analyst added.
Looking regionally within the Lower 48, the Dec. 2-8 trading period brought large basis and fixed price gains for markets in the West amid expectations for locally frigid temperatures.
SoCal Citygate January basis widened $1.424 week/week to trade at a $3.281 premium to Henry Hub, while SoCal Border Avg. basis widened $1.355 to plus-$2.126.
Farther north in the Pacific Northwest, Northwest Sumas front-month basis ended the period at plus $1.616, up 87.1 cents; Malin basis climbed 53.8 cents to plus-93.6 cents.
“Population-weighted HDD forecasts for the next two weeks show an uptick in degree days for the Pacific region this weekend and early next week, signaling there may be significantly increased activity on western pipes to transport gas to end users in the region,” Wood Mackenzie analyst Quinn Schulz said in a note to clients Thursday.
The outlook as of Thursday showed population-weighted HDD totals on track to exceed climate averages by 34% from Wednesday (Dec. 8) through the following Thursday (Dec. 16), the analyst said.
Schulz highlighted a series of notices from pipeline operators in the region, including El Paso Natural Gas, Kern River and Gas Transmission Northwest, indicating expectations for increased demand on their systems.
In contrast to the western basis gains, forward trading at East Coast hubs for Dec. 2-8 suggested a market sensing diminished upside price risk amid recent weakness in space heating demand.
Texas Eastern M-3 January basis fell to plus-$2.796 during the period, a 69.8-cent drop. Transco Zone 6 NY front-month basis tumbled $1.017 to plus-$3.499.