The Only Constant in the Energy Market Formula is Change

 

If the past year has proven anything, it's to throw out all preconceived notions about the energy market. Veterans of the industry once lived by the motto "Lock in by Labor Day" as the market tended to rise soon after as a winter premium enters the forward curves.

This year, the opposite seems to be true.

Leading up to Labor Day, we saw the prompt month and upcoming winter trade north of $10 per MMBtu on Tuesday, Aug. 23. No daily settlement exceeded $10 but nonetheless, it was the bogey everyone was watching for. Ultimately the $10 price couldn't hold and retreated slightly. It still stayed north of $9, however, through the expiration of the September 2022 contract ($9.353 on Monday, Aug.  29) and into the first trading days of the October contract. Thursday, Sept. 1, featured a closing price of $9.262.

With the Labor Day weekend just a day away, the prompt month shed nearly 50 cents on Friday to close the week at $8.786, but that was just the start. Following the holiday weekend, the prompt month dropped 64 cents on Tuesday and another 30 cents on Wednesday. All told, the trading day free fall surrounding Labor Day weekend amounted to $1.42 or more than 15%.  Wednesday, Sept. 7, settled at $7.84. The sell-off exceeds 20% — and more than $2— if we compare it to the trades two weeks ago that were above $10.

 

 

The Real Question is, "Why?"

 

Certainly, moderate weather is helping the cause, but the big mover over the past week has been daily production numbers. We've consistently discussed lackluster production and significantly increased demand as the overarching driver of the extreme volatility and bullishness.  While demand remains strong, the Freeport LNG shutdown reduces energy demand, and mild weather reduces demand . These two bearish factors are helpful but have likely already been priced into the market. We saw a significant dip in Freeport news, and the weather tends to drive most daily market movements.

 

The Race to 100

 

Predominantly, we can instead attribute the three-day free fall to gains in production. The market expects production to reach 100 BCF per day before the end of 2022, but we've spent most of 2022 producing below 95 BCF per day without any obvious path to 100. Fortunately for those hoping prices retreat, we have seen production pick up in the past week or two. A one-week increase of 1 BCF per day doesn't sound like much, but its impact lies in that it comprises about 20% of the deficit on the road to 100 BCF. The production growth was strong enough to give sincere hope to those analysts expecting triple-digit production.

Let's take an even closer look at what 1 BCF means to offer some perspective. 1 BCF per day equates to 365 BCF per year. Looking at our storage graph, if we have 365 BCF more gas in storage, it will take us from around 2,700 BCF to over 3,000 BCF.  It would take us from well below the five-year historical average to perfectly in line with the five-year average and above last year. 1 BCF may not sound like much, but it adds up and can be impactful.

 

Watch Out for the "Gotchas."

 

Certainly, moderate weather is helping the cause, but the big mover over the past week has been daily production numbers. We've consistently discussed lackluster production and significantly increased demand as the overarching driver of the extreme volatility and bullishness.  While demand remains strong, the Freeport LNG shutdown reduces energy demand, and mild weather reduces demand . These two bearish factors are helpful but have likely already been priced into the market. We saw a significant dip in Freeport news, and the weather tends to drive most daily market movements.

As quickly as we add 1 BCF per day, we can lose it. The hope is it will keep growing toward 100, but a decline is also possible.  On the flip side, demand can pick up as well. We know Freeport will restart at some point (likely November), adding two BCFs of demand per day.  

Of course, cold winter weather can drive a multiple BCF per day increase in demand.
It is worth noting that this dramatic decline in the prompt month and prompt winter did not impact future years nearly as much. Comparing prices from Monday, Aug. 22 to Wednesday, Sept. 7., the near winter dropped $1.56, but winter 23-24 shed just 21 cents.  Even more stark is that winter 24-25 fell 3 cents, and winter 25-26 gained 15 cents. 

The days of $3 winter gas seem no longer as future winters are trading in the $5.25 to $5.75 range. Perhaps this year is an anomaly in how volatile and expensive it has become, but we should all be ready to accept that there is little hope that future years will return to $3 anytime soon. That the volatility exists predominantly in the nearest months and winter makes sense and reminds us that we need to take a different view of future years than we have in the past. 

This projection should be top of mind when planning long-term energy spending budgets.

The above comments regarding the NYMEX futures market are for illustration purposes only and the sole opinion of the author and not IGS Energy, its officers or its employees. Neither the author nor IGS Energy shall be liable for any information contained herein. This communication is no way intended to provide guidance or recommendations as to the value of or advisability of trading in any contract of sale of a commodity for future delivery, security futures product, or swap.
 

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