Energy prices have slowly but surely been on the rise throughout much of the past month. This shouldn’t come as much of a surprise considering almost all commodities have shown considerable strength. The price of lumber has surged dramatically, and gas prices have reached $5 per gallon in California.
Nonetheless, natural gas and electric prices have historically let the fundamentals of supply and demand drive energy prices over a sheer bullish commodity market. Over the past couple of years, we’ve seen some historically low energy prices even if other commodities were not at their respective historic lows. Now, everything seems to be surging across the board, but we could certainly argue that the fundamentals justify the bullish strength.
For some perspective, the May 2021 prompt month natural gas contract settled at $2.456 on April 6th. Nine trading days later, on April 19th, it settled at $2.749. That marks a 29.3 cent increase or 12% gain. The market treaded water for the remainder of the week as the prompt month settled at $2.73, but last week brought some added bullishness. Monday April 26th through Wednesday April 28th brought its own 19.5 cent rally, a gain of 7% in just 3 days. All told, from April 6th to April 28th, the prompt month May 2021 contract gained 46.9 cents or 19% to finish at $2.925. The last time the May 2021 contract was in the $2.90’s was that dreadful week in February that some are calling Polar Vortex 2.0.
Factors contributing towards the increase in prices can be found on both the supply and demand side. Lack of production has been one of the main bullish drivers supporting higher prices. Average production per day one year ago was a full 1 BCF per day higher than it is right now. While COVID and the crude price war brought a downturn in daily natural gas production throughout the back half of 2020, we had since rebounded nicely and were back up at our historic highs in early 2021. However, the past month or two have seen a downturn in daily production numbers, and that is concerning for the market.
From a demand perspective, the summer-like temperatures we saw for a week or so in March feel like ancient history. Normal and below normal temperatures have caused some added heating degree days of late which also has helped support the market. Overnight lows in the upper 30’s and low 40’s are still forecasted for much of the Northeast and Midwest into early May which means heaters will still be on many nights.
There are a few other factors that are also adding up to help create this bullish wave. We are in maintenance season for nuclear generators and it seems like it may be lasting a little longer than expected. Exports to Mexico are higher due to some of the normal Mexican production being down for maintenance. All told, we’re seeing bullish factors emerge from the supply side, the demand side, and the overarching commodities market.
A final note regarding the May 2021 contract expiration that occurred on April 28th - the $2.925 expiration price was notably higher than the April 2021 expiration price of $2.586. That was to be expected given the recent bullishness. When comparing the expiration to the prior year, the variance is more eye-opening. May 2020 expired at just $1.794. We mentioned this regarding the April expiration, but it’s important to emphasize again. Assuming we stay in the recent trading range we discussed, the comparison to last year will look bullish throughout the summer. Summer 2020 saw expiration prices consistently below $2.00. At this point, we are closer to eclipsing $3.00 than getting below $2.50, let alone $2.00. If it hasn’t already happened, end users should immediately condition themselves to see higher energy prices than they did this time last year.
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