The bulls have generally been in control of energy markets since July. Over that time frame, prompt month energy prices moved from the $1.50 range to the $2.70 range. It was a seismic shift based on lower production (reduced supply) and warmer weather (increased demand). Last week finally saw a bit of a turning point as the bears assumed control late in the week.
The week started with an uptick on Monday and Tuesday, representing more of the usual trading that had been seen for weeks. Wednesday saw a bit of a reversal to the tune of nearly 10 cents, but the contract was still trading north of $2.25. Then Thursday happened. After surging in early trading to nearly $2.40, the wheels came off and the market tumbled nearly 40 cents over the course of the day. It got as low as $2.003, then settled the day at $2.042. Trading on Friday was lackluster, and the market was nearly unchanged, finishing the week at $2.048 per MMBtu.
For the week, the net drop for the prompt month October 2020 contract amounted to a total of 22.1 cents, or nearly 10%. The 12-month strip was not as volatile, as it only shed about 4 cents or 1.4%. Interestingly, the winter 2020-2021 strip, representing November 2020 through March 2021, shed just 3 cents, or 1%. What this suggests is that the heart of the drop was felt in the prompt month October contract and less so in the future months.
The reason for the Thursday turnaround was twofold. Following the recent hurricane and ensuing flooding in the Gulf states, LNG processing facilities were closed. This minimized our ability to export LNG, which reduces demand for natural gas and causes prices to drop. The follow-through impact from this reduced demand is an opportunity to take some of the now excess production and inject more into storage than originally expected. The extra injections are particularly impactful in the energy markets on Thursdays when the weekly inventory report is released.
Last week, most analysts were forecasting a weekly injection of around 80 BCF, but the 10:30 report showed 89 BCF, which was more than 10% above expectations. While it is only a 10 BCF delta in a landscape where total storage is around 4,000 BCF, the increase was enough for the bears to take control of the market, at least for the near term. With the increase in injections, analysts are now expecting around 4,000 BCF in storage at the end of the injection season, a level not reached since the fall of 2016.
Interestingly, since the downturn in prices was generally storage related, it would seemingly make sense that the sell-off in prices mentioned was fairly limited to the prompt month October contract. Reaching 4,000 BCF is a luxury going into the winter. However, winter prices will not drop substantially until we get a better sense of what winter weather will be like. Another mild winter like last year will certainly send prices falling, but nobody gave up on last winter in the fall. Seeing October prices weaken as we approach full storage makes sense. Perhaps November will also drop as it becomes the prompt month and 4,000 BCF potentially materializes. But, the heart of the winter will not make a dramatic movement until we get into the withdrawal season and see how cold this winter will shape up to be.
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