Market Newsletter – August 2020August 28, 2020
“Do now what nature demands of you. Get right to it if that’s in your power.
Don’t look around to see if people will know about it. Don’t await the perfection of Plato’s Republic, but
be satisfied with even the smallest step forward and regard the outcome as a small thing.”
-Marcus Aurelius, Meditations, 9.29.(4)
“Do now what nature demands of you,” may, on its surface, sound like a survivalist strategy employed only by the likes of the Antarctic explorer Sir Ernest Shackleton, as he managed heroic, life-threatening expeditions of the great unknown continent, or perhaps the more recent phenomenon that is the survival extraordinaire, Bear Grylls, and his predilection of consuming unthinkable caloric sources. Indeed, it is an “implore-to-explore” edict that requires absolute pragmatism in the face of challenging circumstances; but upon further investigation and application, this command, with respect to nature’s influence within the energy commodities markets can be equally useful, and while physical survival is not the primary objective, financial viability certainly is. For purposes of this application, we should interpret “nature” to mean both natural weather cycles as we plod steadily towards winter, in addition to its sphere of influence within the economic law of supply and demand. The two cannot be separated, nor should they be ignored, and as one, “nature” is beckoning end-users to heed Marcus Aurelius’ call to take action within the world as it is – not to dwell on ideals, missed opportunities, or in pursuit of perfection. In doing so, end-users of energy commodities can ensure that the small steps taken today will bear fruit in the world and markets of tomorrow.
For the most part, summer is behind us (though those in CA/NV or the Southeast may disagree) and as such, nature will be providing a bi-annual opportunity in the natural gas market known as the shoulder period. In the fall shoulder period, as cooling demand dissipates, and before the focus entirely shifts to winter demand outlooks (opposite of spring shoulder period), there typically exists a seasonal “lull” in prompt-month contract settlement prices. This pullback is currently underway, and it arrives on the heels of a two month-long price rally for natural gas, which was driven largely by decreasing production and muted injections in the face of increasing domestic demand and some stabilization of export levels. To put it into a numerical perspective – prior to the summer price rally, as of July 1st, the October 2020 contract (now the prompt-month contract) had settled at $1.84/MMBtu; as of yesterday, the same contract was trading at $2.63/MMBTu, representing a 43% increase. During that same timeframe, the 2020/21 winter package (Dec-Mar) has increased by 16% ($2.84 on 07/1 vs. $3.30 on 08/31). The rest of the curve has followed a similar ascent with varying degrees depending upon the comparative focus. Throughout the spring and early summer, and as a clear picture began to emerge of a structurally undersupplied market, the messaging was clear and consistent: go to market now, take advantage of historical market lows, and pre-empt the impending increases by executing long-term supply agreements. Now, the messaging must be tweaked slightly for end-users that were not compelled by
previous market signals: go to market now, take advantage of a momentary and seasonal pullback, and pre-empt further increases by entering into long-term supply agreements.
While the short-term picture includes some expected bearish headwinds, the long-term picture continues to be an increasingly bullish one, with data trends that do not appear to be reversing. By the end of September, we should be falling to 2018 production levels (~86 Bcf/d), a far cry from record-setting production levels witnessed throughout all of 2019 (~95 Bcf/d, which set up the low price environment for 2020, amongst other contributing factors). Furthermore, there’s no sign of production returning to 2019 levels any time soon, and given how current and scheduled exports to Mexico via LNG are significantly elevated relative to 2018, this market is poised to continue to climb once heating demand emerges in full. We know that volatility will soon re-emerge in the market, with the likelihood favoring the upside. Depending on the severity of the winter, the volatility and momentum could be significantly pronounced.
“Get right to it if that’s in your power,” could not be a more appropriate recommendation for the next 1-2 months for end-users of unsecured energy commodities. Be satisfied with the small steps forward – and don’t let perfection be the enemy of good.