The past few commentaries have dealt with the bullishness in the air surrounding all commodities, including energy. Over the past few weeks, the bullish sentiment has remained and is not showing any signs of weakening any time soon. To summarize the past few weeks of trading, here is a look at some milestones:
All told, over the course of 27 trading days from May 28 to July 8, the prompt month surged 70.2 cents or 23.5%. And it seems to have barely taken a rest to breathe during the surge. As discussed in this commentary, the warm weather this summer has followed up the very cold February to create added demand for natural gas. Additionally, LNG demand has continued to grow, which is leaving less gas available to inject into storage.
As usual, the natural gas storage graph paints a perfect picture of what ultimately controls the energy market. As you can see, 2021 started near the very top of the range for gas in inventory. However, February required more gas than usual to be pulled from storage, which brought us from the second highest over the past five years to the lower end of the range. As the summer picked up, injection into storage has not surged as much as usual, and inventories are quickly approaching 2019 levels which would leave only 2018 as lower.
Simply put, the added demand for natural gas has led to some lackluster injections and thus an elevated price of natural gas and electricity.
Looking back at the July 2021 contract expiration of $3.617, it is noteworthy for a couple of reasons. First, it is significantly higher than any other expiration price this year. The first six were all below $3. Further, it is the highest expiration price since January 2019 expired at $3.642. That was 30 months ago.
Finally, we have to look back even further than that to find the last time a summer month saw an expiration price that high. The last time a month between April and October expired higher than $3.617 was in October 2014, nearly seven years ago. Of course, summer 2014 was the summer immediately following the Polar Vortex from January and February 2014. We have seen many ups and downs over the years, but the most recent run-up has brought us to summer prices we have not seen for nearly seven years.
Since the July 2021 contract expired, we have continued to see bullishness in the prompt month to the tune of an additional 8.1 cents for the prompt month August 2021 contract. Interestingly enough, over that same time period, prices for the upcoming winter have gained an average of 9.9 cents. It is quite uncommon for future months to increase by more than the prompt month, but that is exactly what has transpired recently. Clearly, the bullish bias is not just heat wave-related and focused on this summer.
At this point, perhaps the contract most worth watching is the January 2022 contract. It is closing in on $3.90, and we will be very curious to see if it runs out of steam or if it can launch itself north of $4. The market seems to look at certain price points as major hurdles, and one would have to think $4 is a significant milestone. If the weather cools and injections pick up, we would not expect it to eclipse the mark. But if the trend continues, we will be watching closely to see how that follows through to trading for this upcoming winter.
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