December 2021 and January 2022 may not quite be ‘polar’ opposites of one another, but the differences between the two from an energy perspective are very apparent.  From a Heating Degree Day (HDD) basis, December 2021 was the 2nd warmest December on record for the U.S.  If we regionalize that metric to IGS Energy’s core markets, it was the warmest December ever!  January 2022, on the other hand, is just past the halfway point in the month and already has been noticeably colder than its predecessor.  Furthermore, some of the coldest temperatures of the month are anticipated to come in the final two weeks of January.

 

The dramatic change in weather is transparent when looking at energy price movement for the first ten days of the February 2022’s stint as prompt month.  After dropping on its first day as prompt month to a $3.561 settle, the contract gained on 6 of the next 8 trading days.  By January 11th, the February 2022 prompt month was up to $4.249. 

 

Then the biggest move of the 10-day period came on January 12th when the February 2022 contract gained just over 60 cents to settle at $4.857.  This move brought the increase for the February 2022 futures contract from its $3.561 low to $1.296 or 36%. 

 

Of course, January 13th saw a complete reversal of the previous day’s gains.  In just two days, the extreme volatility from the fall of 2021 had reemerged in dramatic fashion after hibernating from roughly Thanksgiving through New Year’s. At settle, the prompt month had shed 58.7 cents to close at $4.27, just 2.1 cents higher than it closed two days prior.  It’s worth noting that the weather forecasts did not materially change to initiate the reversal.  Rather, it appears market dynamics felt the original increase was overdone and self-corrected the next day.

 

It is also worth pointing out that power markets have moved more emphatically in the past month than gas.  While there is no national index to look at for power like the NYMEX is for natural gas, market participants are constantly trading power contracts and have consistently seen intraday pricing for power moves more dramatically than intraday natural gas prices.  This isn’t terribly surprising as power does not have the safety blanket of storage to help supply meet demand.  Instead, power supply must always match power demand, and extreme temperatures are the primary driver for significant increases in demand.  This leaves power prices more exposed both in the real-time market, like we saw in Texas last year, and in the futures market where traders are very sensitive to supply and demand factors.

 

Looking beyond the prompt month for energy prices, we are seeing the price increases extend through 2022 and into 2023.  While the prompt month is up about 70 cents from that $3.56 low, summer 2022 is up almost 60 cents and next winter (winter 2022-2023) is up nearly 50 cents.  While not penny-for-penny, the next year or so is showing more strength than we are used to seeing.  The summer does not routinely move as aggressively as it has over the past few weeks.

 

Perhaps looking to the production graph will help explain why we are seeing some of this bullishness.  Daily production levels have dropped by more than 2 BCF per day and are not immediately showing signs of coming back online.  Market analysts would point out that looking at production is always challenging and that regionality is very important.  It could be that production drops when wells freeze, like we saw in Texas and Oklahoma last year during the polar vortex event. We have seen wells in Appalachia (Utica and Marcellus Shales) drop in production and these wells don’t typically have weather impacts. 

 

The concern in the industry is that producers are not drilling as much as they were in the past quarter which would alter the amount of gas available to inject into storage this summer for the upcoming winter.  With this uncertainty in play, it makes more sense to see the bullishness in prices that we have seen lately for this summer and next winter.  End users can avoid this uncertainty and potential volatility by looking long term to provide budget stability.  Prices for 2025 and 2026 are virtually unchanged to start the year which helps make long-term prices more attractive.


The above comments regarding the NYMEX futures market are for illustration purposes only and the sole opinion of the author and not IGS Energy, its officers or its employees. Neither the author nor IGS Energy shall be liable for any information contained herein. This communication is no way intended to provide guidance or recommendations as to the value of or advisability of trading in any contract of sale of a commodity for future delivery, security futures product, or swap.
 

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