Market Newsletter – August 2019August 01, 2019
It’s a rare treat (and perhaps a testament to the doldrum that is August) to be able to link Shakespeare to commodities markets, but each is full of undeniable truths about human nature and necessary balance. In Much Ado About Nothing, a character by the name of Don Pedro teases an unmarried bachelor that “In time the savage bull doth bear the yoke.” While this line is intended to speak more so to obligations associated with a new wife, it can just as easily be applied, with equal weight, as an explanation of the current the state of the energy markets (beyond its inclusion of bull/bear references).
Last month, I wrote about the potential of an extended bear run for energy commodities for the remainder of the summer. With the exception of power markets in TX (ERCOT), and more recently crude oil futures, this has largely been the case. Given that the natural gas market is currently one that has remained oversupplied to the tune of around 2 bcf/day, the natural gas prompt-month contract slid all the way down to $2.07 in early August, effectively bearing the “yoke” of surplus with no real “savage” volatility to speak of since. While natural gas producers and long position-holders alike may be growing weary of this bear market, from a buyer’s perspective, there is certainly plenty ado about the opportunities at hand. We haven’t seen market bottoms like this in both the natural gas and power markets since early 2016 when the price of natural gas dropped down to ~$1.65/MMBtu. What’s more, we’re on the verge of realizing the lowest summer average Henry Hub natural gas price since 1998.
Unfortunately, this won’t stick around for much longer, as supply growth is beginning to moderate and will continue to do so through the remainder of the year and into early 2020. As that happens, and as present and forecasted demand begins to increase, so too will the price of natural gas and power. As always, there are a few short-term competing factors that will impact price trajectory over the next several weeks and months. Hurricane season is in full swing, with Dorian likely to make landfall in central Florida this weekend. This should serve to further supress demand in the southeast, though hurricanes always have the potential to negatively impact production and supply infrastructure as well. The shot-term weather outlooks for most major demand centers are also largely bearish in nature which should serve to keep a cap on any run-ups associated with extreme heat and increased demand in Texas, whose reliance on gas-fired generation and intermittent renewable generation continues to ratchet up. The most price supportive development right now is tied to LNG exports, and pipeline developments in Mexico. All six of our LNG terminals are now producing and exporting LNG (if not preparing to), and the Mexican government has finally come to an agreement with the Sur de Texas-Tuxpan Pipeline companies, which will be used to move 2.6 bcf/day from Texas to Mexico. Coincidentally, that is just enough to offset the current surplus in the market and restore that Shakespearian balance.