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The prompt month has found a new home in the $2.00 to $2.25 range over the past couple of weeks. In the closing days of the August 2019 contract’s stay as the prompt month, the contract dipped from $2.312 on 7/22 to $2.141 when it expired on 7/29. In just five trading days, the prompt month shed more than 17 cents.
The August 2019 expiration at $2.141 was 15 cents lower than the previous months expiration. More impressively, it is nearly 60 cents lower than the August 2018 expiration price. Further, we must look back to the spring/summer of 2016 to find any expiration price that low. Specifically, we saw March 2016 through June 2016 all expire below $2. Since then, July and August 2019 have marked the next lowest months.
Interestingly, the reason why we are seeing the lowest prices in more than three years is not necessarily demand related. So often we look to temperatures to see how they will impact consumption of natural gas and electricity throughout the year and often the weather is what drives the market. That simply does not appear to be the case this summer as this summer has seen relatively normal weather with only brief stints of abnormal heat or cool.
Instead, this summer’s main headline is natural gas production. Last August, daily US production of natural gas averaged around 80 BCF. So far this August, we are averaging more than 90 BCF per day. The 10 BCF per day increase of production is significant and cannot be overlooked. The continual increase in production this summer (and throughout the past year and a half) seem to be the primary driver of natural gas, and in turn, electric prices.
With strong production, there is more supply than demand and we have been able to inject this summer at a stronger pace. As such, the deficit to the 5-year average has dwindled from 565 BCF in March to just 111 BCF this past week. Current forecasts are for gas in storage to exceed the 5-year average before the end of the injection season.
Clearly, the storage situation is favoring the bears and dominating energy pricing. However, it is worthwhile to note that long term energy prices are also at historical lows. The production gains are expected to continue to increase which continues to help the bearish sentiment in the market. For example, the 36- and 60-month natural gas strip averages are both trading under $2.50 and right around their all time lows established in spring 2016.
On the power side, current prices are significantly lower than they have ever been, including 2016. The tighter correlation of natural gas and electric prices today has led to a more dramatic drop in power prices this summer than power markets experienced in 2016. As such, power markets are at noticeable historic lows. Many are viewing this current pricing as a tremendous opportunity to lock in the commodity for the long term.
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