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Last week was a short week on the NYMEX following Memorial Day weekend. Despite only four trading days, it was still an eventful week due to the expiration of the June 2020 contract on Wednesday, followed by the injection report on Thursday.
Following the long weekend, the prompt month June 2020 contract moved 6.2 cents higher on Tuesday. However, the increase was more than offset on expiration day with a 7.1-cent drop for the day, as the June 2020 contract expired at $1.722 per MMBtu. It marked the fifth consecutive expiration below $2 and was the second lowest of the five with only April 2020 coming in lower at $1.634.
Like last month, on the day that June 2020 expired and July 2020 became the prompt month, the two had expired nearly 15 cents apart. A month ago, June 2020 was trading nearly 15 cents higher than May 2020 when May expired, and now July is nearly 15 cents higher than when June expired. This month- over-month persists in the forward curve throughout the rest of the 2020 months, so it will be interesting to see just how much longer the prompt month can stay below $2. The reason for the premium is that there is increased concern over production declines as we get closer to 2021.
On July’s first day in the prompt position, it unsurprisingly dropped nearly 6 cents. Some of that fall can be attributed to a stronger than expected injection report. A triple-digit injection around 100 BCF was expected, but the 109 BCF injection added more to storage than many were predicting. It brought the 4-week average for May reports to 101 BCF, which is just behind last year’s torrid pace.
The five-year average injection for the past 4 weeks is just 85 BCF. The fact that the current year is injecting at a stronger rate is not surprising since daily natural gas production is at or just below all-time highs. As a result, current inventory levels are now more than 400 BCF above the 5-year average after starting 2020 just 74 BCF above the 5-year average. Right now, the current year is 778 BCF above last year’s levels, but that premium is down slightly from its high of 888 BCF ten weeks ago.
All told, current inventories are very strong considering strong daily production levels and the mild winter that just occurred. The forward market however shows stronger prices for the upcoming winter. One reason is the expected decrease in production that is coming. The other reason for the premium is the fear that a more normal winter will further erode inventories. With this short-term outlook, it makes sense that near term summer prices for July, August, and September are trading below $2. But it also makes sense that January and February 2021 are trading very close to $3 or nearly $1 higher than the summer prices.
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