For market bulls, $3 gas may be getting more and more out of reach. Genscape Inc., which had estimated a storage injection of 30 Bcf, said its estimates for the “current and upcoming gas weeks show relatively stronger injection numbers on the back of notably milder temperatures scrubbing cooling demand loads and exports to Mexico, along with already observable upticks in Lower 48 production,” according to senior natural gas analyst Rick Margolin. Indeed, gas production continues to climb, again reaching a new high in August, which Jefferies LLC analysts said leaves investors more comfortable with entering the winter with storage at a deficit to the five-year average. August production month to date has averaged 81.2 Bcf/d, up another 0.6 Bcf/d sequentially after July posted 1.8 Bcf/d of sequential growth, according to the investment bank. Earlier this week, U.S. production set a new daily record, surpassing 82 Bcf/d for the first time.
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Genscape Inc. senior natural gas analyst Rick Margolin said his firm had been expecting a 30 Bcf build, a print that would have come in well below the year-ago and five-year-average but “is actually loose to the five-year when accounting for degree days and normal seasonality.” Genscape’s Spring Rock daily production estimate for the report week averaged 80.3 Bcf/d, 0.17 Bcf/d higher week/week (w/w) on the strength of gains in the Northeast, Permian Basin and Haynesville Shale. Total demand for the report week was an estimated 80.5 Bcf/d, including an average 38.3 Bcf/d of gas burns, according to Genscape’s proprietary estimate, nearly 2.7 Bcf/d higher w/w “and this summer’s second strongest weekly average,” Margolin said.
Genscape’s Spring Rock daily production estimate for the report week averaged 80.3 Bcf/d, 0.17 Bcf/d higher week/week (w/w) on the strength of gains in the Northeast, Permian Basin and Haynesville Shale, according to Margolin. Total demand for the report week was an estimated 80.5 Bcf/d, including 38.3 Bcf/d of gas burns, according to Genscape’s proprietary estimate, nearly 2.7 Bcf/d higher w/w “and this summer’s second strongest weekly average,” Margolin said. Every EIA region except for the South Central currently sits at or below five-year minimum inventories. While inventory deficits stand to increase after this week’s report, “our estimates for the current and upcoming gas weeks show relatively stronger injection numbers on the back of notably milder temperatures scrubbing cooling demand loads and exports to Mexico, along with already-observable upticks in Lower 48 production,” he said.
Stony Point implied flows (including no-notice) have averaged 1,242 MMcf/d and maxed at 1,346 MMcf/d during the last 30 days, meaning this event could impact up to 536 MMcf/d of mainline flows, Genscape said. “As Stony Point is the main constraint point for the AGT mainline, this event presents significant upside risk to Algonquin Citygate prices and downstream demand,” Genscape natural gas analyst Josh Garcia said. Meanwhile, there are also several meter specific supply limitations affecting interconnects with Tennessee Gas Pipeline (TGP), Millennium Pipeline, Columbia Gas Transmission, Iroquois Gas Transmission System and Texas Eastern Transmission, all of which are upstream or near the Stony Point CS. Supply points downstream of Stony Point, including the Everett liquefied natural gas facility, the Salem Essex interconnect with Maritimes and the Lincoln and Mendon interconnects with TGP, will be relied on heavily, Garcia said. AGT also declared an operational flow order (OFO) on Tuesday, and compounding the issue on the power side is the loss of a transmission line from Hydro Quebec on Aug. 10, which caused a loss of 500 MW of imports to Independent System Operator New England (ISONE), and the loss of about 400 MW of generation from the Pilgrim Nuclear Power Station in Southeast Massachusetts as of Tuesday, Genscape said.
But major obstacles loom in the booming Permian Basin, at least in the short run. Because of hyper growth, the Permian is quickly running out of pipelines to move oil out of the region. "The pipeline constraints are real, but they are transitory," said Vincent Piazza, senior energy analyst at Bloomberg Intelligence. "The infrastructure has had a difficult time keeping up with the explosive growth. More pipelines are coming, but they will take time. Clay Seigle, managing director of oil at research firm Genscape, warned of "significant challenges" for transporting oil out of the Permian until the second half of next year.
Refineries have a major financial incentive to process as much oil as possible. The profit margin on gasoline -- the difference between crude oil and gas prices -- has risen sharply over the past year. Ditto for the profit margin on diesel. "Profitability is strong. That is encouraging these guys to run as hard as they can," said Smith. The US Gulf Coast, the epicenter of America's refineries, reached a new record in early July by processing 9.5 million barrels per day. Some of that gasoline and diesel fuel is getting shipped overseas. That's despite the eruption of trade tensions and tariffs between the United States and major trading partners such as China and the European Union. The government said US exports of diesel and other fuels reached a four-week average of 1.2 million barrels per day in early August. The spike in refinery activity wouldn't be possible without the US shale oil boom. The United States is pumping more oil than ever and may soon surpass Saudi Arabia and Russia as the world's No. 1 producer. "There's no shortage of crude barrels to put into refineries and turn into valuable products," said Dylan White, an oil markets analyst at energy research firm Genscape.
Genscape Inc. said compared to degree days and normal seasonality, the 46 Bcf injection is about 1.0 Bcf/d tight versus the five-year average. And while the latest EIA report helped to slightly close the year/year deficit, the deficit to the five-year average actually widened once again, and inventories are the lowest they have been at this time in the last five years. The data and analytics firm agreed that the situation shows no signs of correcting in the EIA’s Aug. 16 report: its supply/demand model’s preliminary estimate for the week ending Aug. 10 is showing an injection of only 39 Bcf. “While we do show production holding above the 80 Bcf mark, power burns this week have been strong, having topped the 40 Bcf/d level on a couple of days, sustaining what has come to be the strongest summer-to-date for burns in the past five years,” Genscape senior natural gas analyst Rick Margolin said. He noted, however, that Genscape’s storage estimate is early and not its composite estimate, which includes its storage sample. “But at the moment, if realized, we would be looking at an injection about 40% smaller than last year and the five-year average for that week,” Margolin said.
U.S. natural gas exports to Mexico hit all-time highs this month, but a slower-than-expected build out of pipelines inside Mexico has kept increases far below available capacity at the border. The latest uptick in exports, driven by demand from Mexico’s power sector, occurred after several Mexican pipelines began operation, allowing U.S. companies to send more fuel across the border, RBN Energy said in a report. (For a graphic on U.S. natural gas exports to Mexico, see: tmsnrt.rs/2OoMqnv) Over the last decade, U.S. gas exports to Mexico via pipeline have more than tripled, to 4.9 billion cubic feet per day (bcfd) in August, according to Thomson Reuters data. One billion cubic feet is enough gas to fuel about five million U.S. homes.Still, that is less than half the available U.S. gas pipeline capacity to Mexico, which will increase to 13.5 bcfd by year-end when Enbridge Inc’s $1.6 billion Valley Crossing pipeline enters service. “There are a lot of projects to get gas across the border, but a lot of these are dependent on important lines within Mexico,” said Rick Margolin, a senior analyst at energy data provider Genscape. The completion of those pipelines on the Mexican side of the border are facing at least a year’s delay on average, according to Genscape. The U.S.-Mexico Nueva Era project, which includes the Impulsora pipeline in Texas, was originally expected to enter service in mid-2017 but did not become operational until mid-2018 due to construction delays on the Mexico side of the border.
Kyle Cooper of IAF Advisors projected a 47 Bcf build, EBW Analytics expected a 48 Bcf build, Genscape Inc. estimated a 50 Bcf build and a Bloomberg survey had a range of 35 Bcf to 64 Bcf, with a median 47 Bcf injection. The IntercontinentalExchange settled at a 48 Bcf build. Genscape said compared to degree days and normal seasonality over the five-year average, a 50 Bcf-plus injection would appear tight by (0.4) Bcf/d and would do little to shrink the running year-on-year and year-on-five-year inventory deficits. Power burns were estimated to have averaged 35.6 Bcf/d, helping maintain this summer’s spot as the five-year leader of power burns this summer-to-date, Genscape said. Mexican exports averaged 4.8 Bcf/d (including a 5 Bcf/d day) and liquefied natural gas sendout averaged 3.3 Bcf/d.
Turning to the spot gas markets, prices were down almost across the board despite hot weather lingering in key demand regions for another day or so. SoCal Citygate prices continued to come off recent highs as demand has been downward trending during the last couple of days, according to Genscape Inc. Southern California Gas system demand earlier in the week was just above 2.6 Bcf/d, with Wednesday’s nominated demand expected to top out at 2.58 Bcf/d. “These levels are well shy of summer-to-date highs and levels that occurred during recent record-setting price spikes,” Genscape natural gas analyst Joe Bernardi said. In addition to slightly lower demand peaks during the current hot spell, SoCalGas has less competition for flowing supply than the last basis blowout event. Bernardi noted that demand in upstream Pacific Northwest, Rockies, Desert Southwest and Mexican markets has been more moderate, and power loads are currently being satisfied by a better-functioning transmission system unlike during the last heatwave event.