Remember last year’s ‘Texas Freeze’?
Well we haven’t had another one yet, but we might be getting close to it. And the natural gas trade is responding accordingly.
Gas futures on New York’s Henry Hub jumped 16% on Wednesday and were on track to post a similar gain for this week, trading above $5 per thermal unit, as freezing weather gripped most of America amid lower gas output in various producing locations.
The focus was particularly on Texas, where temperatures were forecast to dip below 20 Fahrenheit (-7 Celsius) in many parts in coming days.
West of Texas is home to the Permian oil and gas basin which spills over into New Mexico’s southeast.
“The relative strength of the cold in mid-Texas cannot be understated—consecutive days of freezing temperatures within this week have the potential to lead to additional freeze offs in the Permian,” said Dan Myers, analyst at Houston-based gas consultancy Gelber & Associates.
Midland, the business heart of the oil- and gas-rich Permian Basin, could fall to 11 Fahrenheit over the next few days, Bloomberg reports, adding that Houston will likely drop to 28 and Dallas to 18 by Thursday.
The stakes of another super freeze are high in Texas, where last year’s winter storm led to blackouts and deaths of more than 200 people.
As Bloomberg noted, this year’s storm will test whether Texas Governor Greg Abbott and Republican lawmakers have done enough to bolster the power network, including new rules requiring the grid operator to increase reserve capacity and make it easier for industrial users to get paid to reduce consumption.
Texas officials told the news service that they’re confident the state’s power grid can avoid a repeat of last year’s catastrophic blackouts as a major storm sweeps through the region, though the icy blast could still bring local outages.
In a Wednesday note to clients of Gelber & Associates that was seen by Investing.com, Myers said US gas production had dropped by more than 3 billion cubic feet (bcf) per day as a result of “cooler temperature anomalies.”
He added:
“During this week, production sources from Appalachia and Canadian imports will need to work overtime in order to mitigate further national drop-offs in production. In the short-term, there is downside risk to production as a result of the severe weather conditions ahead.”
The icy blast across the nation and the impending supply crunch in heating fuel could make today’s weekly gas storage update from the US Energy Information Administration as bullish as in the previous two weeks.
Source: Gelber & Associates
According to industry analysts tracked by Investing.com, US utilities likely pulled some 216 bcf from storage during the week ended Jan. 28 to burn for heating and power generation purposes. It was the third straight week of 200 bcf draws after previous back-to-back pulls of 219 bcf and 206 bcf.
According to data provider Refinitiv, the weather was colder-than-usual last week with 230 heating degree days (HDDs) compared with a 30-year normal of 194 HDDs for the period.
HDDs, used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
The 216 bcf draw forecast for last week would compare with the 183 bcf pulled from storage during the same week a year ago and the five-year (2017-2021) average withdrawal of about 150 bcf.
“This is above the five-year average by more than 100 bcf—a testament to the strength of the cold,” Myers said, commenting on the 216 bcf forecast.
He added:
“Higher than average withdrawals are expected to last through the two following weeks as well and drive total storage even lower into the five-year range, well below the five-year average of total inventories.”
Indeed, if last week’s draw turns out to be as predicted, it would cut gas inventories in storage to 2.314 trillion cubic feet, about 6.2% lower than the five-year average and 14.8% below the same week a year ago.
“We are seriously drawing down storage levels,” Bespoke Weather Services said in a commentary carried by naturalgasintel.com.
“And more cold will only add to this issue, making it tougher to refill to comfortable levels by the end of injection season.”
What would this mean for prices on the Henry Hub then?
While fundamentals suggest that double-digit gas pricing may no longer be such a remote possibility this winter, near-term technicals suggest an immediate re-exploration of $6 highs hit earlier this week as Henry Hub’s front-month underwent a contract change.
“If prices manage to sustain above $5.333, we can expect this rally to extend to $5.764 and for strong momentum above this level to explore higher levels of around $6.25,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
Dixit, however, cautions that the market could flip as well without a decisive break above $5.40, adding:
“Weakness below 5.333 can start correction to lower areas, with $4.98 and $4.637 as immediate targets and the 50-week Exponential Moving Average of $4.04 acting as support.”
Source: Gelber & Associates
Zooming away from February and the winter patch, forecasts show the likelihood of robust production growth through 2022 as high crude oil prices in the upper $80s and a drilling rig count in the 600s ensure sufficient associated gas flows.
Gelber & Associates itself expects gas production to reach all-time highs above 96 bcf per day this year.
“Weather-related drop-offs are only short-term bumps along the road that do not impact the larger capital inflows into oil and gas infrastructure or long-term rig development in any significant manner,” said Myers.
Disclaimer: Barani Krishnan 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. He does not hold a position in the commodities and securities he writes about.