It was a wild week for natural gas markets, and yet this dynamic is almost completely obscured when viewing today’s closing price for the prompt month NYMEX natural gas contract (Oct) versus last Friday’s closing price. October futures ended the day at $5.14/MMBtu or a modest $0.035 increase versus the prior Friday. Spot pricing for the weekend started the day strong but dipped just below $5.00 late in today’s trading session, and in general, the week concluded without a material shift at the front of the curve week-over-week. Well, at least that is true for the NYMEX natural gas market.
Over in Europe is where the week’s excitement began. A spike at the front of the TTF curve occurred on Monday in response to headlines that a lobbying group representing industrial consumers in the U.S. was requesting price relief via limitations on LNG exports over the winter withdrawal season. Monday’s closing price for the front month TTF contract was $4.00/MMBtu higher day-over-day, and although the market retreated through the end of the week October TTF futures still closed almost $2.00 higher than the prior Friday.
Exacerbating troubles in Europe was an announcement last week that CF Industries, a large U.S. based fertilizer producer, was shutting down two of its plants in the UK as a result of soaring natural gas prices. The immediate response to this was downward pressure on the TTF market which simultaneously rippled back to the U.S. Interestingly the market reaction, or at least price response, assumed that UK demand would be curbed and those molecules would be pushed back on to the U.S. market. This made little sense for 2 reasons. First, the reaction would assume that CF had no spare capacity to increase production in the U.S., and as a private company, this sort of information is not publicly available. Secondly, even with a hit to European demand, the spread between Henry Hub and Europe was still going to be well beyond variable costs. Finally, by the end of the week, it was announced that at least one of the two CF industry plants in the UK would be restarted to avert a CO2 crisis. The two CF industries plants in the UK produce CO2 as a by-product, and the captured CO2 is used to support the domestic food and beverage industry. The Billingham ammonia plant restart will be supported by a government-backed payment, not a loan, estimated to be worth tens of millions of pounds. In summary, the CF industries event illuminated what levers may be pulled in the coming months to ensure fragile ecosystems, struggling to keep up with commodity demand, are not casualties of the current global supply chain crisis.
Another narrative put forth in respect to European gas markets was the idea that Russian pipeline imports to Europe were being withheld, exerting upward price pressure on a starved market which has seen front month electricity prices in Germany explode to approximately 3 times ‘normal’. Russian natural gas production is likely going to set a record this year, and on the surface, this would lead one to believe there is excess supply that could be sent to Europe. However, it is important to remember that last winter was significantly colder than normal in Russia, and storage levels were consequently reduced to an extremely low threshold. As a result, Russian gas production is rightly being used to refill storage to cover domestic needs ahead of winter. The topic of Russian production and piped exports to the East (Asia) and West (Europe) is worthy of a lengthy discussion on its own, so for now we simply conclude that Europe’s natural gas issues are not by any means primarily driven by Russia.
Now turning to Asia the pricing dynamics of the past week essentially mirror that observed in Europe. The front month JKM contract rolled last Wednesday with the October bullet month expiring at $19.02/MMBtu, and at the time November futures were trading $25.69. A dip in the JKM market mirrored that of the TTF curve with a Thursday retreated followed by a sharp rebound on Monday. The now prompt November JKM contract peaked at $27.52 on Tuesday and essentially flatlined for the remainder of the week with today’s closing price coming in at $27.50. For reference, this is a $2.50 increase for the November contract relative to the prior Friday. Recall that this is very similar to the move in prompt month TTF futures.
In Asia strength of weakness in natural gas futures is almost exclusively a function of demand with very little storage or production available domestically. Headlines regarding the Chinese economy this week have been centered on the Evergrande debt crisis. The second-largest property development company in China struggling to manage a $300 billion debt crisis is not to be dismissed, and capital markets certainly said as much. However, it would take a material ripple effect across all major Asian economies to create a shift in the price of landed natural gas in Asia. Remember that supply shortages across numerous consumer good subsectors, many of which are of course produced in Asia, indicate a backlog of orders could dampen a potential natural gas demand impact from an Asian economic downturn.
With the front of the NYMEX natural gas curve at decadal highs, two trading days short of an October contract expiry which could top $5.00, and spreads to Europe and Asia greater than $15.00 the weeks ahead are likely going to be just a wild as this past week was. There were 3 instances of intraday tests of $4.75 at the front of the NYMEX curve this week, and very mild weather could bring that level into play again before October expires. On the other hand, any hint that below normal temps are in the cards in October could be enough to generate a retest of the rolling prompt month high at $5.65. The net change in spec positioning as reported by the CFTC this afternoon was minimal, and thus there is arguably a clearer path to additional short covering from bears versus profit-taking by bulls.
Zane has been with Mobius Risk Group since February of 2016. His primary responsibility is a fundamental analysis of the North American natural gas market. Additionally, he assists in the valuation of gathering, processing, transportation, and physical sales agreements. His experience in energy has been focused on natural gas, however, as the North American hydrocarbon value chain has become a more integrated system his knowledge has expanded to crude oil, petroleum products, and seaborne LNG. Prior to joining Mobius, Zane spent 6.5 years with a Houston based hedge fund (Goldfinch Capital) with AUM of approximately $750M. In his time with Goldfinch Capital, Zane was tasked with developing detailed models of the North American natural gas market, including 1st derivative components such as power generation by fuel source, supply side impacts of liquids focused drilling, etc. Zane is a graduate of Rice University, and a former member of his alma mater’s baseball program as both a player and coach.