Key Drivers

1. Natural gas NYMEX closed in late August for September delivery at $2.579/MMBTU up $.725/MMBTU from the month before
2. Traders are pricing into their trading models either a major natural gas supply shortage this winter or a surge in natural gas demand or both.
3. LNG Export terminals suffered very little to no damage from Hurricane Laura.  Many LNG cargo ships are sitting in the Gulf waiting to be loaded with new LNG supply.
4. Oil and natural gas platforms in the Gulf are being checked out.  The U.S. may have dodged a bullet there too.
5. Although there is a sizeable natural gas storage surplus vs. a year ago and vs the past five year average, the surplus has been shrinking a little each week.

Commentary

Natural gas pricing for the next month to 18 months will depend mostly on the natural gas supply and demand imbalance.  The rise or fall of natural gas prices will largely depend on three things; winter and summer weather extremes, the price and economic hurdles of getting U.S. natural gas production back up near pre-COVID 19 levels along with the return as well as growth of LNG exports. The primary driver for the $.725/MMBTU NYMEX increase over the past 30 days is the expectation that natural gas demand driven by LNG exports will rise quickly in September and October and will out-pace the return of natural gas supplies heading U.S. markets that  has been drastically hurt both by wells being turned off and new natural gas drilling pretty much stopping due to fall out from COVID 19.  The U.S. Energy Information Administration has forecast that prices will rise due to demand out pacing supply in late fall and carry over into 2021.  Three different times in August we experienced natural gas price surges.  A couple of them occurred right after very neutral data releases. It’s very hard to predict what will happen in September let alone longer-term.  We are often remined to point out that electric decision buyers need  to care greatly about what natural gas prices are doing and try to understand what is driving prices since natural gas prices heavily indicate what electric generation prices will be.  Wholesale electric prices run in close parallel to wholesale natural gas prices.

If you look at the data though, it sure looks like we could see natural gas prices experience a nice price dip in September due to a few reasons: Technically traders are “long”.  This means they have been heavy on buying versus selling NYMEX, which could be part of the reason of the recent price increases.  Fundamentally, the U.S has seen gas wells shut off, new drilling stopped and little interest from banks to fund drilling programs.  These are both bullish factors long-term.  The next couple of months, however, should be much cooler in the Midwest and northeast after a very hot summer lowering natural gas demand for electric generation.  We could see the technical traders selling or lowing some of their long positions in the next month helping to push prices back down some temporarily.  Is there some additional piece of information that we don’t know now that could come to light helping to push prices up or down? This is an extremely important question.  Lately every new piece of information has pushed prices up.

Customers need to proceed with caution.  Do you need to protect your energy cost budget for the next couple of years?  Even with the price run up in the past 30 days prices still are attractive if you look at prices over the past 4 and ½ years.  Since January 2016 prices have only been lower than they are now 19 months out of the past 57 months.   However, if long-term price stability is important to your business, then the recent price surge along with the U.S. EIA forecast should be a real concern if your natural gas or electric contracts expire in 2021 or the first half of 2022.  One thing our many decades of experience in the energy sector has taught us is that as soon as you think you have the market figured out and prices are going to react a certain way, you most likely will be disappointed when they do the opposite.

The increase in generation supply costs on top of higher PJM capacity costs beginning next June are really going to increase consumers’ electric bills.  It is so important to review your energy buying strategy to make sure you are A. buying supply at right opportune time based on trendlines and data to insure the best chance for the lowest price and B.  implementing programs like Peak Load Management and/or Demand Response in hope of shaving PJM capacity costs.   RD Energy’s decades of energy experience, knowledge and data analysis can help your company perform at it’s best to stabilize and reduce electric and natural gas costs.