It would be an understatement to say there’s been a lot of activity since our last Market Commentary. The market has made some dramatic shifts — even on a daily basis — and it wasn’t practical to draw insights until now. Let’s look back briefly and review. From a high level, we can start with recent expiration prices for prompt-month contracts:
Back in February and March, we were basically living in a $4.00 to $5.00 prompt month world. It’s especially important to note that the February 2022 expiration featured a massive last-hour increase before expiration with a sell-off the next day — which smelled very much like a short squeeze at expiration. Even the $4.00+ range was concerning considering $2.00 to $4.00 had been the norm for a multi-year period.
Obviously anyone reading this commentary is aware that $4.00 to $5.00 sounds like a dream right now for the rest of calendar year 2022 and early 2023. The reality is, we’re actually trending closer to $10.00 than $6.00. The assault upwards kicked into high gear throughout April and May. As recently as the week of June 6, we have seen settlements north of $9.00 and intra-day trading around $9.50. We have not yet, however, traded at the $10.00 mark.
To be clear, the price conversation thus far has been limited to the prompt-month. The prompt-month and near-winter have been the most volatile, but the outer years have not been immune either. Looking at winter prices for 2024-2025 (3 winters out from now), natural gas was trading around $3.40 at the beginning of the calendar year. When the prompt-month moved north of $5.00, the outer-winter prices moved closer to $4.00. As prompt-month pricing continued to surge over the past two months, we’ve seen outer-winter prices jump towards $5.00. It’s certainly disappointing for end-users to see a $1.50+ increase in outer-year prices, but this pales in comparison to the prompt-month increases and $5.00 is still highly attractive when comparing the two.
Certainly the geopolitical environment and greater economy play a role. With crude surging and prices at the pump reaching scary levels, it’s not surprising that other commodities are also on the rise. To no one’s surprise, the war in Ukraine is playing a meaningful role. With the world turning against Russia, the country’s natural gas exports are no longer welcome — which means this supply needs to be replaced by other sources. In short, the Ukraine-Russia geopolitical situation is impacting the supply and demand landscape for energy.
It’s worth noting, however, that increased European demand for energy may not impact U.S. prices as much as one would have thought. The reason is because the U.S. is capped in our liquified natural gas exporting capability right now, and adding more capability is a large capital investment that takes significant time. While we are undertaking projects necessary to expand capabilities, we are currently exporting the maximum so incremental new international demand should not realistically matter to the current U.S. supply and demand picture.
While crude is helping to drive prices higher, and maybe Russia not so much, ultimately supply and demand still matter significantly. The EIA chart included below is a great insight to understand the situation. We clearly see the year-over-year rise in demand, represented in red, with most of the recent years’ increases due to exports in pink as opposed to consumption in maroon. The blue represents supply and the light blue portion indicates imports we take from Canada, which are relatively constant. That leaves the daily production, in darker blue, as the key factor that must increase and keep pace with demand.
As we can see in this chart and our production graph, daily production is near an all-time high. The concern, however, is that to maintain ample storage, production needs to be reaching new peaks in the same way as demand. The fact that production is holding relatively steady, and not making meaningful increases, is likely the primary driver of recent price increases in energy. Sustained elevation in production can help alleviate the concern and would likely result in lower prices.
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