Market Newsletter – October 2019October 01, 2019
It’s that time of year when we can all expect to see and hear ghouls and goblins processing through neighborhoods, demanding treats or declaring tricks. Those of us that are more risk-averse assuredly will yield to the former, knowing full-well the downside associated with frustrating the masked marauders (i.e. damp tee-pee on the hedges) vastly outweighs the upside (there really isn’t one). In kind, energy markets tend to present a similar dilemma at this time of the year for consumers of both power and natural gas. With winter fast-approaching, and natural gas injections slated to revert to withdrawals in the coming weeks, we’re faced with the decision to take all/some risk off the table before the seasonal market run-up in prices, or to wait it out with fingers crossed. Given current market dynamics, one could make a case for either action or inaction, though I have always preferred to play it safe and go with the treat option, as opposed to picking the tee-pee out of the bushes the morning after.
The case for making a decision to procure now is a simple one: we are still in the shoulder season when the weather is mild, demand is low, and supply is elevated and stable. Resultantly, power and natural gas prices have remained depressed (multi-year lows) in nearly all markets – the downward pressure will only be eased by bullish short-term weather outlooks (currently the case), and changes to the winter forecast. That’s not to say we haven’t had our fair share of volatility in October, as heat waves earlier in the month led to massive high/low spreads in hourly pricing in ERCOT, PJM and CAISO. Furthermore, with most natural gas traders positioned on the bear side, any extension of the Alaskan ridging causing cold air to be trapped over the Great Plains, Midwest and Northeast could very well lead to a short-squeeze like we saw last November that led to $4.50/mmBtu prices. Any similar type of technical run-up would be more muted however ($2.75 level), as storage levels are in a much healthier position, and natural gas production remains strong.
The case for waiting is a more involved one, and certainly not for the faint of heart. Given that natural gas prompt-month futures ($2.30) are slightly above the multi-year lows we saw back in June and August, coupled with the expectation of an early glimpse of winter in the coming weeks, there’s not much likelihood that prices will be moving down in a material way any time soon. That said, should Dec-Jan-Feb prove to be mild and withdrawals are subdued, this year’s strong production and storage could carry us through the winter relatively unharmed and leave us entering the Spring shoulder season at a surplus to the five-year average, and almost certainly with respect to last year (anomalous). As of now, most winter forecasts are calling for a late start to winter, but one that is likely to be spotted with extreme instances of extended cold snaps.
The temptation to remain firmly planted on the sofa while the doorbell rings is strong, but thwarting a child is and will always be a dangerous endeavor.