Market Newsletter – March 2019March 01, 2019
With most of March behind us, and winter seemingly with it, let’s take a quick look back at what has transpired in (what should be) the final weeks of the natural gas withdrawal season. The last two EIA reports for weeks ending March 1st and March 8th have each been relatively large when compared to historical averages, and in fact, at 149 Bcf and 204 Bcf respectively, have come in at more than double what we saw last year for the same weeks and similar proportions when compared to the five-year average. The late-season elevated withdrawals were directly related to an unseasonably cold start to the month that impacted the entire west coast, and most of the upper Midwest and Northeast. Unsurprisingly, the prompt month contract (April) has consistently traded above prices witnessed in most of February, and have continued to slowly advance, though any extreme volatility has been largely muted. Given that the short-term weather outlook has turned completely bullish, the weather component doesn’t appear to be a major contributor to the recent price gains at this point. Not until a clearer picture of summer demand expectations emerges will weather again be a marked factor. At this point, other factors such as increasing export activity and a rather large storage deficit appear to be contributing to much of the gains.
Natural gas inventories in underground storage now sit at a seriously whopping 32% deficit when compared to the five-year historical average. And, while this deficit is not expected to grow any larger, it should be understood as a solid indication that natural gas supply/demand dynamics are still very much a living, breathing organism that is adapting to an equally active surrounding environment. There are a variety of relatively new price factors seemingly at odds (from a natural gas perspective) presently: an increasing level of LNG exports being readily replaced by record natural gas production, decreasing overall power sector demand along with increases in gas-fired replacement generation and efficiency, pipeline expansions mirrored by pipeline disruptions, to name a few; and it remains to be seen which, if any, will tip the scale one way or the other in the coming months. Even though it is projected that the storage deficit will begin to shrink throughout April and May, right now, it is tough to imagine a scenario that would wipe the storage deficit during 2019.
With that fundamentally price-supportive natural gas backdrop in mind, any indication of extreme weather/demand events this upcoming summer are likely to trigger some of the recent-record demand levels and prices we witnessed this past summer. So much of what makes a hedge successful is not in timing the market perfectly, but in avoiding foreseeable risk. Given that both the power market and the natural gas markets have been relatively subdued of late with the shoulder season rapidly approaching, I anticipate there will be a bevvy of good hedging opportunities in April and May for customers that have not procured their energy obligations for 2020 and beyond. With so many factors of growing significance and influence now contributing to the market, removing the price risk in the forward curves during this Spring should prove to be a successful strategy.