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It’s nearly official…winter is over. The groundhogs said so, and weather forecasts continue to align with their findings. The author of this column was even able to spend the evening of Monday, Feb. 3 outside with his kids as if it was a Monday between April and October.
Commodity prices agree. Last week, the February 2020 contract expired at $1.877 per MMBtu, which is nearly 30 cents lower than that of January 2020. November 2019 expired at $2.597, marking over four months that the prompt month’s expiration has dropped by more than 25%. The last time any prompt month expired under $2 was back in June 2016 ($1.963), and we have to go back to March 2016’s $1.711 expiration to find a price lower than February 2020.
It is safe to say we are at historically low prices. Comparing year over year prices is especially interesting. A year ago, February 2019 expired at $2.95, more than $1 higher than February 2020. Looking at the 4-month average of expiration prices for November through February is even more telling. November 2018 through February 2019 averaged $3.623, while November 2019 through February 2020 averaged $2.276. The reduction is more than 37% or nearly $1.35.
Now that we have belabored that point, it is worth noting that inventory levels are NOT at all-time highs. They aren’t even at the highest level in the past five years. Through four withdrawals, 2016 inventory levels were more than 200 BCF higher than current 2020 inventory levels. Remember March through June 2016 is also the last time prompt month trading fell below $2. Winter 2015-2016 was also a non-winter so the comparison to four years ago seems fair.
What happened to prices throughout the summer of 2016? While the winter was well above normal, the summer was also extremely above normal, which peaked demand for electricity and in turn demand for natural gas. As the summer wore on, the large inventory surplus eroded to more normal levels and prompt month energy prices surged towards a more comfortable $3 level.
Only time will tell what this upcoming summer will bring. Inventories are strong now, but there is also added demand for LNG exports which could play an important role in impacting the supply and demand balance. For now, there is very little fear in the market. As a result, not only are prompt month prices at or near historic lows, 12-month strip and long-term prices over the next five years are all at very desirable levels. For example, the 36-month strip is currently trading around $2.30; but in 2016, the then 36-month strip was around $2.65. While both years featured very low prompt month pricing, longer term prices are much lower this year than four years ago.
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