Not so fast, bears! Huge drop in production fuels recovery in natural gas futures prices

Natural gas futures rallied on Tuesday, with low overall liquidity leading to a likely over-response to a temporary drop in production. Despite an unfavorable short-term outlook, the November Nymex gas futures contract jumped 36.7 cents to $6.837/MMBtu. December futures rose 37.1 cents to $7.174.

In short :

• Pipeline maintenance slows down production
• Uncertain mid-October cold intensity
• Spot prices rise on cold snap

Spot gas prices rose almost everywhere, outside of some continued weakness in Louisiana. NGI’s Spot Gas National Avg. jumped 44.5 cents to $5,195.

With the weather yet to move the price needle decisively in one direction or the other, traders focused on Tuesday’s high-day production data which showed a sharp drop in production of 2 .4 billion cubic feet/d. Wood Mackenzie said the declines were concentrated in the northeast, Texas, northern Louisiana and the New Mexico portion of the Permian Basin, where maintenance or operational issues are ongoing. Most issues, however, should be resolved by Friday.

Northeast production declined by approximately 1.2 Bcf/d, with most of the decline occurring in southwest and northeast Pennsylvania. Production in West Virginia and Ohio also fell.

In southwestern Pennsylvania, EQT Corp. and Equitrans Midstream Corp. are each performing planned pipeline maintenance, while Millennium Pipeline has begun work on its system in northeastern Pennsylvania. Tennessee Gas Pipeline held a one-day event Tuesday for a pig race. This is in addition to other restrictions on the 300 line from station 307 to station 313 from previous weeks.

In Ohio, Rockies Express Pipeline has ongoing maintenance at the Columbus Compressor Station, which is impacting east-west flows through the 380 segment. ‘about 410 MMcf/d, concentrated in the Permian, with some maintenance events starting Tuesday on El Paso Natural Gas.

The New Mexico Permian was down about 250 MMcf/d, mostly on the Transwestern Pipeline, while North Louisiana production could remain constrained until mid-month due to various pipeline works in the region. .

Despite the sharp drop in production, there might be more room to probe downsides.

Robert Yawger, director of energy futures at Mizuho Securities USA, pointed out that the November Nymex contract traded at an intraday low of $6.310 on Monday. It was only half a cent above the three-month low of $6.305.

“Natural gas threatens to consolidate below the 200-day moving average,” Yawger said.

ICAP Technical Analyst Brian Larose pointed to potential bottoming action in the gas market. He said the 50-week moving average has been a consistent support level for Henry Hub prices since the start of the rally from $1.432. The current 50-week moving average currently sits at $6.229, just a few cents lower than Monday’s close.

“Hold this line on a weekly closing basis, and we could be looking at some major bottom action,” Larose said. “Don’t hold that line,” and the analyst said gradual declines to $5.730-$5.325 and “even $4.807-4.712 become possible.”

Watch the weather

Although the market remains weeks away from any significant widespread cold, there are indications that fleece jackets and Uggs may soon be needed.

NatGasWeather said the US model for the global forecast system tended to be colder with a cold front in mid-October, while the European model wasn’t as aggressive pushing colder Canadian air into the Lower 48. It’s not that the European data doesn’t reflect cooler temperatures arriving in the northern United States, it’s “just not as impressive,” according to the forecaster.

Until then, demand due to light to moderate weather is expected to continue, NatGasWeather said. Comfortable conditions are expected to continue through Friday before demand picks up slightly over the weekend, thanks to the cold system moving through the Midwest, Ohio Valley and New England.

The typical lull in shoulder season demand fueled bear markets, which have been gaining momentum in recent weeks. In addition to the general supply growth, the lack of general demand for heating should lead to a substantial increase in storage inventories.

Already, the Energy Information Administration has reported consecutive injections of 103 billion cubic feet. Amid rising production and weak demand, NatGasWeather said a supply increase of more than 600 billion cubic feet is expected over a six-week period. That brings the end-October inventory estimate to 3.5 Tcf, a level not quite “as scary as many expected a few months ago.”

Of course, given the low liquidity, the gas market could be shaken at any moment, according to the firm. And with the bulls sharply increasing the November contract on Tuesday, “the bears are frustrated again that they can’t maintain momentum,” NatGasWeather said.

Meanwhile, the continued fallout from Russia’s invasion of Ukraine has also led to frequent fluctuations in the market. Russia last week reported damage to four lines of its Nord Stream gas pipeline network that connects to Europe, adding to supply problems given already reduced gas flows to the continent. US and European officials said Russian sabotage was the likely cause of the Nord Stream damage.

[Want today’s Henry Hub, Houston Ship Channel and Chicago Citygate prices? Check out NGI’s daily natural gas price snapshot now.]

Meanwhile, the Kremlin said last Friday it would annex around 20% of Ukraine, while state-run Gazprom PJSC warned it could cut off all supplies to Western Europe via the EU. ‘Ukraine. Over the weekend, the company suspended gas deliveries to Italy. Russian threats to use nuclear weapons against Europe and the West “are also leading to nervous trading in many markets,” NatGasWeather said.

Fortunately, the cold weather can wait a little longer for Europe. DTN forecaster Steve Strum said October looks milder than normal for the continent, with the risk of cold weather increasing late in the year in western parts of Europe. “The amount of cold observed in December is still uncertain.”

Spot Price Gathering

Spot gasoline prices rose on Tuesday despite continued generally mild weather outside the East Coast. Although a weather system is expected to start moving eastward on Wednesday, high temperatures are expected to remain up to 20-25 degrees below normal in some places.

The National Weather Service (NWS) said an upper-level shortwave trough over the Great Basin is expected to move southeast over the central/southern Rockies and eastern parts of the southwest. This should produce some rain in the region before pushing south and east into the Midwest. Temperatures in the Northern Plains and Upper Midwest are expected to dip late Wednesday behind the front to near or below zero Thursday morning, NWS forecasters said.

As for prices, overnight gas from Carthage averaged $4,720 for Wednesday’s gas delivery, up 32.5 cents per day. NGPL S. TX gained 55.5 cents for an average of $5,025.

In the midsection of the country, where some of the coldest weather of the fall season is in store, Southern Star gasoline spot prices climbed 51.5 cents to an average of $4,845, while Lebanon’s cash rose 42.5 cents to $5,130.

In the Rockies, Northwest Pipeline Wyoming Pool cash averaged about $4.955, up 31.0 cents on the day. Given fresh air and tight pipeline capacity on the East Coast, Iroquois Zone 2 veered 71.5 cents to $5.645 on average, while Texas Eastern M-3, Delivery jumped 40.5 cents at $5,225.