Market Newsletter – March 2021March 29, 2021
Written by: Luke Nemes, Director, Energy Procurement & Market Intelligence
“Il n’est pas certain que tout soit incertain.
(Translation: It is not certain that everything is uncertain.)”
― Blaise Pascal, Pascal’s Pensees
Uncertainty in commodity markets tends to behave like that “lingerer” at a family function; you’d like for it to be on its merry way so you can begin the clean-up, but it ignores the subtle hints and before you know it, you’re making up a bed in the guest room for it. At this time last year, I was writing about the fear and uncertainty as debilitating forces as the global COVID-19 pandemic cut swaths of uncertainty into every aspect of our daily lives. The resultant economic uncertainty led to some of the lowest Henry Hub settlement prices in decades as natural gas spot prices at the national benchmark Henry Hub in Louisiana averaged $2.05/MMBtu in 2020. For end-users, this was a favorable outcome for budgets and energy procurement activities, in the short-term. Prices increased in the second half of the year because of lower natural gas production and an increase in liquefied natural gas (LNG) exports, two hugely crucial metrics moving forward. Flash forward to today, and uncertainty remains the dominating force within the energy markets, yet the impacts for end-users may not be so favorable in 2021 and beyond. Indeed, the EIA still forecasts $3.14/MMBtu for 2021 and $3.16/MMBtu in 2022.
Last month, Texas demonstrated that the reliability of delivered power can be uncertain, and the industry is still grappling with the structural challenges and political fallout. Furthermore, missing industrial demand from Gulf-Coast refineries that remain offline following Winter Storm Uri, combined with quickly rebounding natural gas production has led to consecutive “surprise” EIA storage reports. While industrial demand outages may continue to linger in the immediate term, prolonged outages have likely created product back orders that may result in higher industrial demand ahead. In general, Texas remains rife with question marks regarding structural solutions and recommendations, but all indications are pointing to mandatory winterization of generating assets and natural gas infrastructure. Associated operating cost increases will most likely be reflected in higher market prices paid for by the end-user.
Last week, uncertainty made its own bed smack dab in the middle of the global LNG market after an enormous cargo ship blocked Egypt’s Suez Canal. Almost 10% of total seaborne oil trade and 8% of global LNG trade passes through the Suez Canal, according to the US Energy Information Administration. LNG exports have been a pivotal balancing force over the past 6 months, and this recent development adds a new wrinkle to the European storage, which appears to be bottoming out at just over 1,130 Bcf, 165 Bcf below the five-year average, and 935 Bcf below last year. After this winter’s price spikes in Europe and record spot market prices in the global LNG market, the appetite to refill European storage is likely to be strong, creating a huge year-over-year increase in injection-season demand for natural gas. This will remain a significant bullish driver for natural gas prices in the coming months and we can reasonably expect 80%-90% export capacity utilization this summer.
All uncertainties aside, there is one thing we do know for certain. Higher prices are needed in the coming months to prevent a significant supply shortfall next winter. Current forward prices point to storage stocks falling to 1,084 Bcf by the end of March 2022, according to Goldman Sachs Commodities Research. Should U.S. gas prices follow the current forward curve through October, the firm estimates winter 2021-2022 gas prices would need to rally to at least $3.70, more than 25% above current forwards, to help take March 2022 storage above 1,500 Bcf. With most market signals and analysts pointing to an impending increase in Henry Hub forward prices this summer, we recommend end-users consider buying the recent dip to take the upside price risk of the table for the balance of 2021 and through 2022. Flat production, growing (and sustained) exports, a stronger economy (and demand), and a warm La Nina summer are all part of a recipe that should cure low prices and correct an unsustainable storage trajectory. Beyond that, calendar years 2023-2025 are all still trading in the lower 20th percentile band when compared to 5-year history, and hold considerable value (~$2.50) when compared to where 21/22 is headed ($3+).