Natural gas futures lose streak – barely – progress on freeze-off threats, spot prices rising

Natural gas futures posted gains on Wednesday amid fears a severe and widespread winter freeze could force production disruptions, ending a three-day streak of sharp losses. The January Nymex gas futures contract was at $5.332/MMBtu, up six-tenths of a cent a day. February was up 2.2 cents at $5.238.

At a glance:

• Prompt month gains six tenths of a cent
• Rough weather could shut down production
• Analysts see memory dump in 80s-90s Bcf

Spot Gas National Avg. surged from $6,960 to $16,065 as bitter cold blanketed the west and center of the nation.

Natural gas production was around 99 Bcf/day on Wednesday. But with freezing temperatures in the Midwest also expected to hit the east on Thursday and Friday, and freezing temperatures projected as far north as Texas later in the week, analysts said wellhead freezes and production cuts were likely.

The final days of this week will bring “one of the coldest outbreaks of winter yet,” according to NatGasWeather, with a “dangerous arctic blast” bringing freezing temperatures to the Rockies and Plains and as far north as Texas. “A hard freeze over production areas is expected to drop fluxes by several Bcf, if not lower, to almost 95 Bcf/day.”

In addition to snowstorms in the Midwest and freezing rain in parts of the Northeast, “freezing air is also expected in the South and Southeast, as well as the potential for infrequent snowfalls,” the company added.

Futures markets had faltered for the previous three days on forecasts of mild weather towards late December and early 2023. But the intensity and breadth of winter weather this week tipped the markets in favor of the bulls for at least a day.

The “looming” demand slump in early 2023 suggests further downside could materialize after the short-term cold wears off, with February becoming the front month contract next week,” said Eli Rubin, senior analyst at EBW Analytics Group. In the short term, however, “freezing risks over the Christmas weekend – with options expiring in January and final settlement early next week – could help bolster support for Nymex gas prices.”

The weather in Texas, in particular, could wreak havoc this week, although analysts said it’s unlikely to match Winter Storm Uri of February 2021.

“We do not expect a repeat of the Uri production impact and associated gas-fired power plant outages,” Wood Mackenzie analysts Colette Breshears and Eric Fell said in the Southwest Power Pool and Electric Reliability Council of Texas areas on Wednesday. “This is partly due to weathering effects” – after infrastructure improvements – and “partly to the nature of the storm (this year promises to be extremely cold but dry and fast-moving)”.

The arrival of the freezer on a bank holiday weekend, when demand is often “suppressed” relative to norms, could also help in part to mitigate the impact, analysts added. “Since December, inventories are much higher and LNG plants are on standby to cut demand if conditions warrant.”

The futures market on Thursday will focus on the US Energy Information Administration (EIA) inventory report for the week ended December 16th. Analysts expect withdrawal from storage in the high 80s to low 90s bcf.

A Bloomberg poll on Wednesday put withdrawal estimates between 80 Bcf and 96 Bcf, with stocks expected to fall 89 Bcf midway. A Reuters poll revealed forecasts ranging from pulls of 80 Bcf to 110 Bcf and a median drop of 94 Bcf.

NGI modeled a pull of 83 Bcf. The five year average is a withdrawal of 124 Bcf.

EIA last reported a 50 Bcf reduction in natural gas storage for the week ended December 9th. The result reduced inventories to 3,412 Bcf and left underground stocks close to last year’s level of 3,430 Bcf and the five-year average of 3,427 Bcf.

Physical Pricing Power

Cash prices rose on Wednesday as temperatures dropped.

NatGasWeather said the “powerful Arctic blast will sweep the US over the next few days with rain, snow and very cold lows of -20 to 20 degrees over the northern US and 0 to 30 degrees” in the south. It forecast robust natural gas heat demand for the weekend and the start of next week.

The cold started in the west and spread to the east. Prices rose on the west coast and through the Rocky Mountains on Wednesday.

Northwest Sumas rose $25,040 to $50,330 on average day/day while Malin gained $30,760 to $55,380 and SoCal Citygate $20,930 to $48,740.

In the Midwest, Chicago Citygate rose $12,285 to $17,690.

In Texas, Space City Weather meteorologist Eric Berger said freezing conditions were expected across much of the state, including Houston, through Thursday evening.

“Winds will be very gusty, up to 35mph from the north. This will make for extremely uncomfortable conditions outside of Thursday night and Friday morning when apparent temperatures drop into the single digits,” he said. Friday will be sunny but still “very cold with a stiff northerly breeze. Daytime highs are likely to briefly spike above freezing for most of the region, but we can expect another very cold night, with lows only 2 to 5 degrees warmer than Thursday night.”

Houston Ship Channel climbed $1,700 to $5,815 on Wednesday.

Looking further out, from December 28th to January 4th, NatGasWeather sees a dramatic shift. Warmer than normal temperatures are expected to spread across the country, west to east, with highs of 30 to 50 degrees over the northern United States and “very nice 60’s and 70’s in the southern US.”