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First and foremost, we hope everyone is staying safe and healthy through this historic pandemic. Prompt month energy prices took a dive last week as more businesses shut down, which will immediately reduce energy demand. In fact, by week’s end, the prompt month was trading at a 20-year low for any prompt month contract!
The prompt month April 2020 futures contract dropped 5.4-cents, 8.6-cents, and 12.5-cents respectively on Monday, Tuesday, and Wednesday last week. The 3-day fall totaled 26.5-cents, or more than 14%. Thursday and Friday featured offsetting 5-cent moves. A nickel gain on Thursday was erased on Friday.
Both Wednesday’s and Friday’s settlement price of $1.604 marked the lowest recorded prompt month settlement price in over 20 years. The previous low was set in early March 2016 when the April 2016 contract dipped down to $1.639.
It’s not surprising that winter 15-16 and winter 19-20 have yielded the historic lows. Both lacked any major cold weather for most of the season. Inventory coming out of winter 15-16 was the healthiest we have ever seen at nearly 2.5 TCF. This year’s end of winter inventory, right around 2 TCF, was not quite as strong. While nearly 20% lower, this year’s inventory is still more than enough considering daily production levels are 28% higher now than they were four years ago (92 BCF/day vs. 72 BCF/day).
Interestingly, inventory levels coming out of the winter 16-17 were also slightly higher than current levels. However, that year is less comparable since it was the beneficiary of the previous year’s high inventory. The comparison between winters 16-17 and 19-20 is rightfully garnering all the attention.
At this point, the big unknown in the current year is the impact that COVID-19 will have on the demand side of the equation. This week has brought more stay-at-home orders, which are starting to impact not only the service industries, but also the manufacturing sector—the notoriously large-scale energy users. Understanding the scope and impact of the demand loss is something we will continue to watch, but we will likely not fully grasp this for weeks or even months.
Shifting gears beyond the prompt month, it is important to point out that while near-term prices are dropping to historic lows, uncertainty in the market is driving futures prices up further out into the curve. In the same week that the prompt month dropped 26.5-cents, the calendar year 2021 strip gained 2.4-cents.
Looking more closely at the nearest 12 months, we saw aggressive drops throughout this summer with every month losing more than a dime. This is expected, as demand disruption will most immediately impact this summer. Net winters’ prices however were not nearly as volatile. The winter 20-21 strip dropped just 2.4-cents, and every month from March 2021 and beyond saw an increase last week.
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