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We’re all familiar in one way or another with the limbo – most of us will have participated or observed the dance at a party or otherwise celebratory event like a wedding. In extreme circumstances, we may even have the misfortune of being an unwitting participant of an icebreaker in a less familiar setting. In any event, the goal remains the same – to pass underneath a bar that is repeatedly set at a lower height for each passing. (This, of course, is a modern interpretation of a more complex history; the limbo was performed in reverse fashion originally and was traditionally witnessed at funerals and wakes in Trinidad to celebrate the life cycle). So why is this pertinent to discussions pertaining to the natural gas and power markets, and how is it applicable to the current state of those energy commodities? I’m glad you asked, because the answer requires us to look at where that bar is now (it’s extremely low), how it got there, where it might be headed, and who is still left dancing.

Those of us who regularly follow the natural gas market will readily profess this simple truth: natural gas prices have been progressively sliding since Nov-2019 and are now at historic lows. The lows are no longer historic from a three-to-five-year perspective, they are nearing all-time lows. In fact, we are now seeing prices in the spot market that haven’t been eclipsed since 1999; at last week’s low of $1.83/MMBtu, the energy commodity was trading at its lowest price for January in twenty-one years. The Feb2020-Apr2020 forward contracts continue to all trade below the $2/MMBtu mark, while the summer packages also continue to move closer to that psychological barrier. To put this in a recent perspective, natural gas futures are now over 60% lower than the most recent highs witnessed in November of 2018. How did we get here? Simply put, overall supply growth steadily increased during that time period, while demand has failed to keep up in any meaningful way; the market is structurally oversupplied. Dry gas production has been expanding for 138 consecutive weeks, and storage levels (2,947 Bcf) are now significantly in surplus when compared both to this point last year (+23.3%) and the five-year average (+9.3%). The largest withdrawal this winter has been -161 Bcf, and withdrawals since then have only averaged -76 Bcf, an extraordinarily low figure considering we are in peak demand season. As it stands, the weather picture for early February means there isn’t much room to improve the oversupplied condition – there could be some technical support on the horizon, but come spring time (and potentially even before), we could see natural gas prices test the $1.611 low that we saw at the end of peak demand season in 2016.

So in terms of the limbo, the surplus is the bar and natural gas producers are holding it, and seemingly at their own expense. In this version of the dance, even those holding the bar must attempt a pass, and as I mentioned last month, several producers are not nimble enough to continue producing below the $2 price point. They’ve become a victim of their own success in many regards as it is no longer a profitable undertaking. We’ve seen multi-billion-dollar write-offs, spending cuts, and a general movement away from further investment and capital expenditure. The good news for producers is that the oversupplied condition is beginning to right itself, albeit slowly and slightly, and production has retreated from December heights. In fact, the EIA forecasts U.S. dry gas production will drop by 600 mcf next year, the first annual decline since 2016, as low prices finally rein in drilling in the Appalachia. LNG is doing all it can to help producers lift the limbo bar, reaching record demand levels last week at 9.1 Bcf/d, but China’s tariffs on U.S. LNG are adding some additional weight to the bar.
For now, the only people left willingly dancing the limbo are the consumers. If that’s you, be sure to stretch, go low, and go long. Markets have a tendency to correct themselves one way or another, and picking the bottom isn’t nearly as important as getting under the limbo bar while it’s still low.

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