Thanksgiving is just around the corner, which means winter is upon us. The energy markets tend to start placing far greater significance on weather over other factors during this time of the year. To be clear, factors like production, storage inventories, LNG exports, and others still matter. However, they do not matter as much as winter weather.
The prompt month over the past few weeks tells us everything we need to know. On October 30th, the December 2020 prompt month contract settled at $3.301. It dropped about a quarter over the next two days. Sure, the election occurred in that timespan, but the outcome was far from clear as the energy market was dropping. Warmer than normal weather forecasts were the clear instigator for the fall.
By November 9th, the prompt month had settled at $2.859, over 44 cents lower than the October 30th settle. Over the span of just six trading days, the prompt month had dropped a whopping 13%. Again, warmer than normal forecasts throughout much of the U.S. drove the decline.
Then, forecasts leveled off during the week of November 9th and the prompt month December contract moved higher on the news. It settled just shy of $3 on Tuesday, Thursday, and Friday that week. It is worth noting that Wednesday, November 11th, was Veteran’s Day and markets do not make official settlements on national holidays. Essentially, energy prices entered the weekend at $2.995 and were looking for their next direction.
Updated weather forecasts over the weekend dictated that direction in a clear and decisive way on Monday, November 16th. The prompt month December shed nearly 30 cents to finish Monday at $2.697. That amounts to a single day move of 10%. Prices held steady Tuesday and Wednesday before dropping another 12 cents on Thursday, November 19th, to $2.592. While the inventory report on Thursday showed a larger than expected injection, prices were already down ahead of the report on the heels of further warming in the weather forecasts. At one point on Thursday, prompt month prices were down nearly 20 cents to $2.525 but rebounded slightly to the $2.592 level before the day finished.
All told, over the course of the 13 trading days from October 30th through November 19th, the prompt month December 2020 contract has dropped 70.9 cents, or 21.4%. Interestingly, the January 2021 contract has dropped nearly the same amount and is currently at $2.72. February and March 2021 have tried to keep pace in shedding 66.1 and 57.4 cents respectively. But the bearishness fades rather quickly after that. April 2021 has dropped less than 40 cents over those same 13 trading days.
It is not surprising to see the extreme bearishness limited to the first couple months and not beyond this winter. While weather forecasts are leaning warmer now and that certainly impacts near term pricing, forecasts can and will change so no one is going to completely give up on the end of this winter, next summer, or the following winter until we get further along.
To that point, over the same 13-day time period that winter 2020-2021 has dropped an average of 66 cents, winter 2021-2022 has dropped just 22.4 cents. Winter 2022-2023 is down just 4 cents while winter 2023-2024 and winter 2024-2025 are each up 3.1 and 6.3 cents, respectively.
Longer term rates are still very cheap, but for the first time in quite a while, the upcoming winter is trading lower than future winters. Around the end of July, there was a minimal difference between various winters, and they were all virtually even. We must go back to the end of March 2020 to find the last time that winter 2020-2021 was trading lower than future winters. In May 2020, the near winter was trading 44 cents higher than winter 2024-2025. By early September 2020, that premium had reached 55 cents. After dropping slightly, it surged to over 60 cents by the end of October. In the past 13 trading days, that 60-cent premium has turned into an 8-cent discount. Long term prices remain very attractive and at or near historic lows, but near-term winter prices have finally come back to Earth after trading at a premium for many months. And it’s all because of weather forecasts.
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