Key Drivers
- U.S. Natural gas storage is still running ahead of this time last year (up 14%) as well as ahead of the past 5 year average (up 12%)
- Multiple LNG terminals still off-line from Hurricane Laura weakening short term daily spot prices
- Rising global demand for LNG with winter nearing and more than a dozen empty cargo ships waiting in the Gulf for the U.S. LNG terminals to come back on-line
- $40 oil keeping investors uninterested in new drilling programs keeping the drilling rig count and new associated natural gas supplies down about 75% from pre-COVID 19 levels
- The long-term fear that without new natural gas supplies hitting the market natural gas demand will overtake natural gas supply pushing up prices this winter and throughout 2021
Commentary
On August 25th September NYMEX settled at $2.579/MMBTU. By Monday, September 28th October NYMEX settled for the month at $2.101/dth. Today November NYMEX is trading today at $2.662/dth (up $.22 today from Friday October 2nd ). Due to weak daily October fundamentals the October cash market is selling at a steep discount compared to the October $2.101/MMBTU settlement. It’s very likely that by the end of November NYMEX trading (October 28, 2020), NYMEX will either drop by a lot at the end of the month to meet cash prices, cash trading prices will sharply rise to meet higher November NYMX prices or the two will consolidate somewhere in between. From Friday to today something fundamental happened to cause NYMEX for November delivery to jump $.22/dth. December is up $.16, January is up $.15 and February is up $.13 and so on. That reason probably centers on LNG exports. There’s word today that some cargo ships have anchored in port at one of the nation’s leading LNG terminals to start loading. The market has been waiting for this. If this is true and the 12+ cargo ships sitting in the Gulf all start docking and loading ship after ship after ship, then demand will force daily cash prices up.
Also while seasonality does play into NYMEX prices, NYMEX is a FUTURES price meaning that traders are looking beyond daily fundamentals and looking at long-term issues. Long-term could mean anything beyond day to day concerns. In this case the driver of higher NYMEX prices is the lack of drilling and expected gap between supplies available for growing natural gas demand both in the U.S. and globally. In the old days natural gas was mostly a winter time demand issue. If that was true today and with natural gas storage so full, NYMEX prices would likely be very low. However, the world has literally changed. The U.S. is one of the top LNG exporters in the world. Plus, natural gas is now the number one sourced fuel for electric generation rather than coal. In addition, natural gas exports to a growing Mexico manufacturing sector is growing each year. Natural gas demand is now year round and is global. All of this demand developed out of a strong nation-wide drilling program due to $70+ oil prices as well as the development of new U.S. Shale sources and the advanced technology of horizontal drilling all happening from the seemingly unlimited supply sources around the county. Drilling came to an abrupt halt when COVID 19 happened and in March oil prices plummeted. Investors have shown little interest in getting back into it with the with COVID 19 still here, fear that a second wave could hit in the U.S. and while so many things are unknown. Of course, another reason they aren’t interested in jumping back into investing in drilling is that oil and natural gas prices are so low. Investors were never looking to invest in $2.00 natural gas. Their interest was in $70+ oil. Natural gas was just a by-product of $.70+ oil and it didn’t matter if it sold cheap. Oil is near $40 now and thus investors are waiting.
We like to reiterate each month that while it appears that we talk primarily about natural gas we do so since it is the primary driver of electric prices. Without a deep understanding of natural gas trends and wholesale market complexities a Buyer won’t be able to have a good indication of the electric prices and their trends. We work hard to use our past and present industry knowledge and experience to prepare our clients for the future. We believe our decades of industry knowledge and experience combined with our focus on helping our clients build a strong energy buying strategy year after year is what makes us truly unique in an industry cluttered with telemarketing and aggressive high pressure sales people.