In lieu of a more typical Friday Focus we decided to use this forum to cover today’s sharp rally in NYMEX natural gas pricing. A move of today’s magnitude, and a Cal ’22 strip nearing $3.00, warrants a contextual view of the current forward curve along with some thoughts on what’s next.
First, lets take a look at the prompt month contract (July) which climbed to $3.33/MMBtu in intraday trading, and eventually closed up $0.147 at $3.296. On a spot continuation basis, today’s intraday peak bested the most recent intraday high (2/17) by two cents, and the closing price of $3.296 is the highest daily close for a nearby contract since the December ’20 contract ended the day on October 30th at $3.354.
The front winter (Nov ’21 – Mar ’22) ended the day at $3.43, which is $0.12 higher than the front winter peaked at back in October (Nov ’20 – Mar ’21), and the highest a front winter has traded during the month of June in more than 6 years. The last time a front winter approached the $3.50 mark in June was 2014. For reference, the winter ’21-’22 strip moved up $0.116 today, and has climbed almost $0.60 since early April.
Bal ’21 ended the day at $3.344 after a pick up of $0.137. The Jul-Dec ’21 strip dipped to $2.704 in early April, and the $0.64 rally over the past two months has pulled this tenor the highest level it has traded at since 2016. How much power demand will be lost if today’s rally is sustained will be the key question floated in the market. Recent data points indicate the first $1.00 increase over the prior year did very little to curb the bid from natural gas fired power plants. Over the months of April and May, and including the first 10 days of June, the comparison versus last year is near flat.
Calendar 2022 made a run at the $3.00 mark at the end of today’s regular session, but the rally fell just short with a $0.062 gain leading to a closing price of $2.983. The 2022 strip has not closed above the $3.00 mark since December of 2016. Versus the low of $2.37 last spring the 2022 strip is clearly sending a very different signal to the producing community. Whether or not $3.00 is enough to restart U.S. dry gas production growth is a question without an answer for the time being. The durability of a move towards $3.00 plus how much access to capital is available will first have to be answered.
The back of the curve does not need to be covered in detail today as the changes were minor and the move from being anchored near $2.50 up in to the $2.65-$2.70 range has been covered in several of our previous daily reports. Respective closing prices for Cals 23-25 were $2.716, $2.651, and $2.641 on Friday.
We have long contended that a 24-month strip beginning six months out is the prudent gauge by which to assess the likelihood of market shifting changes in supply growth. From our perspective a reasonable round number floor that must be held in order to strongly consider the prospective of multi-basin growth is $3.00-$3.25 depending on where basis markets are trading at the time. With forward basis strips relatively strong in most all producing markets outside of Appalachia, the bottom end of the range is a logical proxy. At present the forward 24-month strip beginning 6 months out conveniently begins with the Jan ’22 contract. The simple average of Cals ’22 and ’23 as of today’s closing prices was $2.85. While this is arguably a level which will be a catalyst for more aggressive Haynesville growth, and some of the more economic locations in Appalachia, it is likely not enough to bring on a wave of MMBtus from across all lower 48 regions.
Price elastic demand changes will be increasingly hawked over the coming days and weeks, and the debate over when production growth resumes will intensify. All the while a more important issue looms for NYMEX natural gas market participants at least through March of 2022. The lack of an adequate refill for European storage ahead of next winter is quickly becoming a dire situation, and downstream markets in Asia and Europe have responded. Clearly the Asian market must trade over Europe or risk losing cargos, which is unacceptable without any material storage capacity available relative to annual demand. At present the JKM strip (Asian market) does not dip below $11/MMBtu until April of 2022, except for the July contract which sits at $10.92. In Northern Europe the TTF curve is $9.00 or more through Mar of 2022. The concept of pricing to turn off LNG exports if more U.S. produced gas is needed domestically must contemplate where Asian and European prices are at the time.
Another interesting factor resulting from the quickly evolving natural gas pricing environments in the U.S., Asia, and Europe is the correlation between natural gas and power. For the U.S. gas producer, an understanding of how power costs can be passed through midstream agreements is as important now as it has been in at least a decade.
Zane Curry
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.