Market Newsletter – February 2018February 01, 2018
The final week of January was one marked by relentless cold and corresponding upward market movement. This arrived on the heels of the second largest recorded inventory withdrawal (-288 Bcf) since the mark set during the Jan. 10th report week of the 2014 Polar Vortex. The largest ever recorded withdrawal occurred a mere two weeks prior when the EIA reported a whopping -359 Bcf withdrawal for the week ending January 5th. Not surprisingly then, the total stocks (2,139 Bcf) are significantly decreased when compared both to last year at this time (-19.3%) and to the five-year average (-16.2%). As a result, the prompt trading month swelled to $3.63, the highest prompt-month settle since May of 2017, for the final five consecutive sessions of January, giving the bull camp plenty of confidence heading into February, especially as rumors of another nationwide cold front began to weave its way into weather models. However, as we have seen before, as mother nature giveth, she taketh just as readily.
Fast forward to present day; the prompt natural gas contract (Mar18) is down to $2.74, sliding from $3.20 over five consecutive days. So, what has changed in such a short period of time? From where does this newfound front-end volatility stem? The answer is threefold: 1) U.S. natural gas production continues to clip along at record-setting levels. That is not going to change any time soon, as our natural gas reserves boast quadrillions of cubic feet of energy, especially within the Marcellus and Utica shale region, 2) The rest of the world (China, Mexico etc.) is following suit as we continue to prioritize natural gas as a generation fuel for power, and 3) we continue to expand our LNG exporting capability which will position us as the world’s leading exporter of natural gas, increasing the overall demand side of the equation. Relatively flat futures curve indicates the market is presently confident in our ability to meet the long-term heating and cooling demand (via generation). In the meantime, the short-term demand and corresponding price movement will fluctuate with changes to the short-term weather outlooks. When all else appears relatively balanced, deviations from the expected weather-related demand will continue to inject wide swings into the front end of the natural gas curve. It is with this context that we can explain the last two weeks and the $0.90 movement in the commodity’s prompt month trading levels. Projections of the cold snap that many expected to sweep across the country in the coming week have largely subsided, and so too has the price of natural gas. As we move forward, expect the short-term focus to remain on deviations from expected weather; as traders will begin to look beyond winter, expect volatility of the summer strips to pick up increasingly. A prudent buyer would begin to look at any expiring contracts well ahead of this year’s shoulder season, as it is expected that the coming weeks will offer some advantageous, yet momentary, buying conditions.
Last month, we highlighted the DOE’s NOPR filing that would have provided cost recovery remedies for inflexible generation assets such as coal and nuclear plants. Largely viewed as a poorly veiled political attempt to prop up supportive interests, the proposal was rejected by FERC and was in turn handed off to individual ISO’s to determine how they would define and effect the grid resiliency that was purported by the DOE to be the reasoning behind issuing the NOPR. This matter will continue to be passed along, picked apart, and eventually either adopted in part or wholly rejected.