With impressive heat starting to build in the South and supply concerns simmering now in the second month of the traditional injection season, May natural gas bidweek prices shot up nearly $2.00 month/month. NGI’s May Bidweek National Avg. jumped $1.875 to $6.775/MMBtu.
The May 2022 bidweek average was substantially higher than last year, when May 2021 bidweek prices averaged $2.685. However, it fell short of the May Nymex futures contract, which rolled off the board at $7.267 against the backdrop of weather-related production declines and an escalation in Russia’s war on Ukraine. The war is expected to keep the call on U.S. natural gas exports strong through the remainder of the year and beyond.
On Monday, production was showing signs of recovery. Bloomberg showed Lower 48 output back at around 95 Bcf/d. That is up from the sub-92 Bcf/d levels from a week ago following a blizzard that hit the Rockies and led to freeze-offs. However, this still is well below the 97 Bcf/d seen at the end of last year.
At the same time, several pipelines are undergoing planned maintenance, limiting gas flows. Production data also fluctuates heavily in the first few days of the month, creating uncertainty for a market looking for signs of stronger output to alleviate supply concerns.
Meanwhile, Energy Information Administration production data released Friday showed a 0.56 Bcf/d month/month decline in February production, led by freeze-offs in Pennsylvania (0.47 Bcf/d) and Texas (0.16 Bcf/d). This was a steeper-than-expected decline and led to a downward revision in estimates of current supply.
However, there were some positive signs in the EIA data. The agency reported modest month/month gains in the Haynesville, Bakken and Niobrara formations, as well as in the Anadarko Basin.
These gains point to recovering, broad-based supply indicators and a budding framework for significant dry gas production gains later this year, according to EBW Analytics Group. “If supply growth does not materialize until the fall, however, significant upside price pressure on Nymex futures is likely in the interim.”
Summer Kicking Off
With heat already starting to build in the southern United States, the pressure is on production growth to materialize in order for the market to get a little more comfortable with the storage trajectory ahead of next winter.
Inventories as of April 22 stood at only 1,490 Bcf, according to EIA. This was 305 Bcf below the five-year average of 1,795 Bcf, leaving a steep uphill climb for the remainder of the injection season.
NatGasWeather said the coming week is expected to be warm over the southern states. Daytime highs were forecast to reach the 90s in some cities, with the hottest weather in the Southwest deserts and at times into Texas and Florida. Overall, though, the weekend weather data maintained a relatively bearish pattern May 10-15 as the northern United States finally warms into the “very nice” upper 60s and 70s for light demand, according to the forecaster. The South, however, also could see temperatures rise, leading to more widespread coverage of highs in the mid-80s to lower 90s.
Given the potential for increased cooling demand as the month progresses, Houston Ship Channel May bidweek prices rallied $2.025 month/month to average $7.040. Agua Dulce climbed $1.980 to $7.015.
Farther west, KRGT Del Pool May bidweek prices averaged $7.150, up $2.220 on the month.
Price gains were slightly less in California, where the forecast for early summer was expected to be quite a bit different from last year. Rather than record heat, the May/early June period on the West Coast is expected to see brief shots of rain and even high elevation snow, according to AccuWeather.
The eventual warmup, though, should quickly melt the snowpack, improving water reservoirs temporarily. Mountain snow across California was well below normal this past winter, meaning there was not as much snowmelt feeding into the already depleted reservoirs, AccuWeather said.
Water restrictions and limited hydroelectric power are expected across the region following the dry winter months, according to the forecaster. Earlier this year, the water level in Arizona’s Glen Canyon Dam, one of the most critical water reservoirs in the West, dropped to the lowest level since its creation in the 1960s.
“If the water level continues to drop, it could threaten the hydroelectric power generators at the reservoir,” AccuWeather meteorologist Paul Pastelok said.
Elsewhere across the country, benchmark Henry Hub prices jumped $1.945 month/month to average $7.265 for May baseload gas.
“Overall, we view weather patterns as neutral to slightly bullish the front seven days, then slightly bearish for days eight to 15 as total degree days drop below normal,” NatGasWeather said. “The net result will be to stall deficits near 305 Bcf though May 9, then improve slightly May 10-15.”
Exports Also Climbing
Of course, by the time heat becomes more widespread, export demand also could begin ratcheting up, driven by increased pipeline flows and via liquefied natural gas (LNG) shipped overseas.
Europe is working in overdrive to refill storage inventories ahead of winter. At the same time, hot weather south of the U.S. border in Mexico should keep pipeline flows strong.
Longer term, the war in Ukraine and Europe’s urgency in weaning itself off Russian energy are expected to keep demand high for U.S. LNG. Commercial activity for export projects not yet sanctioned has dramatically increased since Russia’s invasion of Ukraine.
On Monday, NextDecade Corp. announced that it signed a 15-year sale and purchase agreement (SPA) with Engie SA for 1.75 million metric tons/year (mmty) of LNG from its proposed Rio Grande export facility. The free-on-board basis SPA is for the first two trains of the proposed 27 mmty project, to be sited on the southern tip of the state in Brownsville. Each of the proposed five trains is expected to have 5.87 mmty of capacity.
Also Monday, Energy Transfer LP said it clinched a deal to supply Gunvor Group Ltd. with 2 mmty from its not-yet-sanctioned Lake Charles facility. Under the 20-year SPA, the LNG would be supplied on an FOB basis, and first deliveries are expected/ as early as 2026.
The Biden administration also has committed to fast-tracking LNG plant approvals and sending more supplies to Europe as Russia threatens energy security on the continent. There are roughly 20 LNG projects under development in the United States.
