Market Newsletter – June 2020June 01, 2020
“I remember better days
Don’t you cry `cause she is gone
She is only moving on
Chasing mirrors through a haze”
– Graham Nash, Better Days
Surely, the call to remember better days is something we can all relate to presently. With 47.2% of the civilian labor workforce presently out of work, and with 1 job opening available for every 4.6 unemployed persons (the ratio was 0.8 in January), extant COVID-19 protocols have pushed the economy into a possible second Great Depression. More than 40 million people lost their jobs in March, April, or May. Such a scenario has obvious impacts on national energy demand and continues to present both challenges and opportunities for energy market participants and end-users. For example, the American Chemistry Council’s activity barometer is now reflective of levels consistent with wartime economies shutting down towards the end of WWI and WWII, and recent U.S. Industrial Production figures released by the U.S. Federal Reserve Bank paint an equally bleak portrait of the economic activity and production. Presently, the NY Federal Reserve is projecting that the current economic recession is projected to continue through at least the third quarter. Indeed, we have seen better days, and it remains challenging to assume a semblance of optimism about the near future, but what does remain readily available is an opportunity to take advantage of significantly undervalued natural gas and wholesale electricity markets.
With respect to the energy market, the downturn in economic activity (to put it lightly) has led to a massive shift in focus on the underlying fundamentals – namely, we are moving from a supply/production market to a market dictated by demand. We know that systemic overhauls to energy commodities production are well-underway, evidenced by a series of Cap Ex announcements and rig count reductions to decade lows, in an attempt to provide price support and stability, but those are proving to be insufficient measures in the short term. In fact, natural gas prices are near a 25-year low as of Thursday morning, as the summer heat has yet to materialize, and oversupplied conditions persist. Until current demand levels begin to increase, which requires the emergence of sustained cooling demand (July-August) and LNG export economics improving (September), the current low-price environment will persist. For now, the warmer-than-normal trend has been fleeting at best, with CDD gains offset by reductions later on, and more than 40 LNG cargoes scheduled to be loaded at US export terminals in August were said to have been cancelled by customers — similar to what was reported for July. All told, the bear thesis should hold firm for at least another two months.
As previously mentioned, at the end of this bear tunnel is what many expect to be a sharp reversal of natural gas prices towards the end of 2020 carrying into Q1 2021 and
beyond. Natural gas production, despite remaining at a healthy level of (in light of decreased demand) ~89 Bcf/d, is still expected to keep trending lower. Furthermore, the 2021 futures curve is ~50% higher than the prompt month, suggesting that the market will be in much tighter balance in 2021, despite strong end-of-season storage projections. If we look at what Wall Street is doing, and it’s worth looking, it is telling of a similar expectation – as of February 2020, hedge funds were net short ~310,000 contracts, positions which have performed well over the past few months as natural gas prices have continued to move down. As of June 16th, hedge funds were ~73,000 contracts net long, indicative of an emerging wager that these low prices are not here for the long-haul.