Unless February weather in US turns colder, there will be further downside to the NYMEX natural gas March contract, as fundamentals are expected to weaken until production starts to decline by the second half of this year, Barclays noted in a report.Furthermore, the y/y shortfall in nuclear generation continues to improve, which is now contributing to less than 200 MMcf/d of incremental y/y gas power burn.
“By March, we expect y/y growth in nuclear generation.” the Bank said.
Natural gas prices tumbled on Thursday morning, last week as a much-smaller-than-expected storage withdrawal hit the market. Even before Thursday, a turn in weather expectations had already wiped out the previous rally and seasonal spread tightening almost instantly.
Natural gas storage for the third week in January withdrew 194 Bcf, 13 Bcf smaller than the market’s average expectation. Despite a continued y/y shortfall in production, Canadian imports spiked for the week as a result of freezing temperatures hitting the Northeast and upper Midwest, thus making su pply a much smaller tightening factor for the week.
On the other hand, residential and commercial demand were robust as temperatures were 12% colder than this time last year, but were somewhat offset by the lower y/y power demand as coal displacement was more than 2 Bcf/d lower y/y due to higher prices.
Nevertheless, the storage deficit widened further; however, if we factor in near-term weather forecasts, it would be difficult to construct a scenario in which storage finishes March below 2 Tcf.
Near-term weather forecasts continue to indicate that this winter, despite being much colder than the previous one, is still on track to be about 5% warmer than normal, with the assumption of normal weather for half of February and March.
In fact, there would have been even lower prices so far if it were not for freeze-offs in the West curtaining production significantly during the peak of this winter.
Source: Barclays