October 2019 Energy Update
Key Drivers
- Natural gas Storage: EIA predicts end of seasons levels slightly higher than 5 year average
- Natural gas storage: weekly injections coming in at record levels and natural gas demand drops
- Normal cod winter predicted: no El Nino or La Nino currently in the Pacific ocean
- Speculative traders not going selling short NYMEX ahead of a predicted normal winter: lowers price drop potential
- Natural gas drilling rig count has dropped 24% since April 2019: flattening or even falling production in 2020?
Commentary
Long-term wholesale commodity prices for electric and natural gas are very attractive when compared to historical prices. When comparing wholesale prices for the past 9 years, 2019 (especially now) are the lowest they’ve been other than 2016. In August and September speculative wholesale energy traders began lowering their “short” position and it squeezed wholesale prices up around 30% to $2.75/MMBTU before they tapered off. Over a 5 week period speculative traders lowered their short position by 185,000 contracts. As we head into a winter that is lacking an El Nino and expected to be a more normal cold winter, it’s doubtful speculative traders will start selling short again, which will help keep prices from plunging as they were expected to do in early August. The key driver in the very short term is natural gas storage and how much gets injected over the next month. Also critical is when winter in the Midwest and Northeast will actually begin? Warmer than normal temperatures are hanging on well into October and looking like they may last until at least mid-October. The EIA is expecting natural gas storage to end the injection at levels 16% higher than levels one year ago, but only slightly higher than levels seen on average over the last 5 years. The fundamental facts remain a constant. Long-term energy prices are at the low end of historical prices. Even if prices do fall some in the short-term, long-term prices are much less affected. Natural gas production is very strong now, but will the dropping rig count in both the natural gas and oil drilling sectors effect supplies? And by how much in 2020? Will LNG export demand continue to increase now that more LNG plants are in service and U.S natural gas prices are attractive versus those in Europe and Asia? And finally, how cold will this winter be?