Natural Gas: When Best-Laid Plans for Production Culling Go Awry

Gas prices jumped almost 8% between Monday and Tuesday due to moderately lighter production levels expected from maintenance events in the Permian Basin. More output disruptions have also been eyed for the coming weeks from NGPL’s planned shutdowns.

Output hovered just above the key 100 billion cubic feet per day mark on Wednesday, though that was still about 2 bcf/d lower than summer highs. Some repair work in the Permian shale gas basin was also slated to culminate this week. As a result, upward revisions to production estimates should be expected, Wood Mackenzie said in comments carried by trade journal naturalgasintel.com.

Traders also took profits after the October contract jumped more than 20 cents over the week’s first two sessions, the trade journal observed.

The weather outlook, meanwhile, maintained a decidedly bearish tilt heading into Wednesday’s trading. For the rest of this month and the start of October, benign temperatures are expected to permeate the majority of the Lower 48.

“Long-range weather maps maintain strong high pressure over most of the U.S. Oct. 1-10 for widespread above normal temperatures,” NatGasWeather said, noting this would translate into comfortable highs from the upper 50s in the far north to low 80s in southern markets “for light national demand.”

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

Demand also took a dip since the start of this week, though in the words of John Sodergreen — author of “The Desk,” another trade publication on gas — it “didn’t exactly fall off a cliff.”

“But the dip was sizable, to the tune of roughly 4.4 bcf/d,” Sodergreen wrote.

“It all adds up,” he said, giving a breakdown by Mobius Risk Group to illuminate the situation:

• Static production
• Strong weather-adjusted power burn
• Surprisingly resilient Mexican export demand
• Stabilizing  LNG feed gas demand

Shoulder seasons — where summer transitions to winter via fall — are never easy to reckon. Nowadays, though, the scale of it all in the natural gas space is simply so much bigger than ever before, and the speed of tacks and jibes in price and sentiment has never been as swift.

Production is also a bigger concern now than before, especially with North America having broken a string of consecutive weekly losses in gas rigs, as per the latest rig count report from oil services firm Baker Hughes on Sept. 15. Week on week, the United States registered nine more land rigs, with eight of them in gas.

While the latest Drilling Productivity Report of the U.S. Energy Information Administration, or EIA,  forecasts a dip in production month on month, it seems that some sizable upside risk for production is now quite possible or even likely.

Ryan Parsons of Gelber & Associates notes:

“Production typically ramps in Q4 to take advantage of  elevated Winter cash prices, and the current state of oil markets  has presented producers with an additional powerful incentive  to up their output.”

“The data so far confirms this thesis, as rig  counts have now halted their previous downward trend, gaining  for multiple weeks in a row. The outlook of front-month bullishness contrasted with winter bearishness is reflected well in the  forward curve’s (recent) movement, as the sharp October rally has produced very little upward pressure on the barely changed  prices of Winter contracts.”

Wet gas supply is also on the rise, with liquefied natural gas, or LNG, production spiking with no lengthy shutdown at the Freeport terminal or any big boomer hurricanes.

Criterion Research said it expects LNG feed gas demand to average 13.15 bcf/d this month.

“Operational issues at Freeport brought actual nominations lower, with month-to-date LNG averaging 12.77  Bcf/d. Looking into the final stretch of September, we expect  another decline in feed gas as Cove Point LNG is taken down  for its annual outage as well.”

For October, Criterion estimates around 12.76 Bcf/d. 

Rhett Milne of NatGasWeather.com said the net result of the coming three weeks of bearish weather patterns is for much larger builds to line up, a few of which could exceed 100 bcf/d,  starting with next week’s EIA gas supply-demand report.

But before that, we have the EIA’s update on gas storage for the week ended Sept. 15 to contend with first.

Notwithstanding the latest rise in production, gas in storage stood at 3.205 trillion cubic feet, or tcf, at the close of the week ending Sept. 8. — some 203 bcf higher than the five-year average. That was down from the prior week’s storage level of 222 Bcf. The surplus has narrowed for each of the past 10 weekly storage reports, easing worries that storage would finish the injection season at record levels above 4 Tcf.

“Prospects for a 4-plus Tcf end of October inventory level have faded, but storage is still likely to end the season at elevated levels, which has kept prices in check,” BofA Securities strategist Francisco Blanch said. Inventories “are likely to reach 3.81 Tcf at the end of October, the highest level since 2020 (3.96 Tcf) and before that, 2016 (3.91 Tcf).”

Barring an exceptionally cold winter, “we expect inventories to exit winter 2023/24 at 1.77 Tcf, near five-year highs. If realized, this inventory path may cause Henry Hub gas to trade below our forecast of $3.50/MMBtu (4Q2023/1Q2024) and below the current forward curve,” Blanch added.

“A mild winter would put inventories on a path to hit new seasonal record highs by March and could lead to a repeat of sub $2/MMBtu prices at times early next year as high end-of-winter inventories reignite the possibility of hitting storage constraints next summer.”

A consensus of analysts tracked by Investing.com suggests that the EIA report will print a smaller-than-normal build of 65-plus bcf for the week ended Sept 15 versus the five-year average of 84 bcf. 

Late summer heat last week overshadowed steady production and is widely expected to result in a bullish storage figure for the latest period, analysts said. That could bring some joy to bulls frustrated this week by the gas market’s adaptation of Robert Burns’ observation on the best-laid plans of mice and men.

***

Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.