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Natural gas futures shrug off supply threat sinking lower with focus on warming

March natural gas futures tripped lower Friday, Feb. 16, as the market shrugged off the possibility that the titular withdrawal season will end on March 31 with inventory at the second lowest level since 2010. The market instead favored lower demand outlooks supported by weather. The contract closed the week down 2.2 cents on the day at $2.558/MMBtu.

The end-of-season total working gas supply was jeopardized by the larger-than-anticipated and larger-than-average storage withdrawal of 194 Bcf outlined in the U.S. Energy Information Administration's Feb. 15 report that covered the week to Feb. 9. The total working gas supply was pulled down to 1,884 Bcf, which is 433 Bcf below the five-year average and 577 Bcf less than last year at this time.

If net withdrawals from working gas stocks match the five-year average for the remainder of the withdrawal season, working gas stocks will total just 1,269 Bcf by March 31, considered the titular end of withdrawal season. That figure is 25% lower than the five-year average and the second lowest end-of-heating-season level reported since 2010, the EIA said in its Feb. 15 Natural Gas Weekly Update. Working gas stocks ended the 2013-14 heating season at 837 Bcf, which is the lowest reported level during that period.

Weather outlooks however, are softening the blow, with both midrange and longer-range forecasts suggesting warmer air will replace cold in the major heat-consuming Northeast and Midwest markets. Midrange, the six- to 10-day weather forecast from the National Weather Service shows above-average temperatures across nearly the entire eastern half of the country with a band of normal temperatures in the central and Southwest separating the above-average temperatures from the below-average readings that dominate in the western half of the country. For the eight- to 14-day period, above-average temperatures expand to include the East and a larger portion of the central U.S., shifting the band of normal temperatures toward the west-central U.S. and shrinking the area of below-average temperatures in the West.

Longer range, the National Oceanic and Atmospheric Administration's latest temperature outlook issued Feb. 15 indicates that there is a 40% or better chance that above-normal temperatures will prevail across most of the Northeast, the Southeast, Texas and parts of the West Coast from March through May. Southern Texas and much of the Southwest have the highest chance of seeing above-average temperatures through the period. The Midwest, regions of the Northwest and the north-central U.S. have the greatest chance of experiencing average to below-normal temperatures from February to April.

"The markets are leaving the wintertime in North America and that means demand will nosedive," FX Empire analyst Christopher Lewis said in a note.

The warming should signal natural gas demand lower and allow more natural gas to remain in underground storage facilities, while allowing additional production to augment the supply.

While dry natural gas production remained constant week over week averaging 78 Bcf/d in the week to Feb. 14, outlooks call for production to climb in March. The EIA expects that shale ouput of natural gas will have grown for 12 consecutive months in March, with gas output coming in 19.0% above the same month a year earlier to set a new record.

More fracking is about to come online, Lewis said.

However, reports of delayed shipments of sand used during the hydraulic fracturing process could impact production levels.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas index prices, as well as forwards and futures, visit our Commodities Pages.