Energy markets have been remarkably flat since our last commentary was published in early August. The prompt-month natural gas contract traded between $2.50 and $2.96 over the past 5 weeks, but these numbers can be misleading. Prices reached $2.959 on 8/8 but dropped the next day below $2.80. Excluding the 8/8 anomaly, the prompt-month trading range has been confined to a narrow 30-cent trading range between $2.50 and $2.80.

False Alarms & Future Volatility

Why the sudden increase on 8/8 and subsequent drop-off? Concerning news arose on 8/8 that there would be a strike by Australian liquid natural gas (LNG) workers. While Australian LNG is not as impactful as U.S. LNG, any potential disruption in LNG deliveries is major news in the energy world. In the simplest terms, less LNG means less supply, which is bullish for energy prices. The fear was short-lived, however, as the strike never materialized, and prices reverted back to their recent ranges.

Looking beyond the prompt-month and out to the heart of the winter, January 2024 prices have behaved a little differently over the past few weeks. At the beginning of August, January 2024 prices were around $3.70 and surged to almost $3.90 on the Australian LNG rumors. While the prompt-month sold off the next day, however, January 2024 prices actually continued to climb. They marched higher toward $4 and spent nearly a week at those elevated levels.

The combination of some significantly hotter weather in August and the Australian LNG headlines allowed doubt and uncertainty to creep into the market. The futures market may not be willing to sustain higher prompt-month pricing right now, but the market is clearly telling us winter prices remain more susceptible to volatility than the prompt-month. Traders are more anxious to immediately discredit news when thinking about heart-of-the-winter pricing.

Fall Temperatures & Falling Prices

Since temperatures have moderated recently and are forecast to remain normal or lower, winter pricing has subsided back to the $3.70 range for January 2024. Below-normal fall temperatures are critical to winter pricing, as fall is a major injection time for storage inventories.

Over the past 7 weeks, we have injected just 177 Bcf of gas into storage. That equates to an average of 25 Bcf per week. That average is much lower than historical norms for the heart of the summer, but is expected, given more natural gas is used for power generation now than in years past. In periods of extreme summer heat, more natural gas is used for power generation and less is available to inject into storage.

As a result of the recent hot weather, inventories are now at just 3,148 Bcf. That’s good enough to rank as the second-highest level in the past 6 years. However, it also translates to just the fifth-highest level in the past 9 years. In other words, the surplus to historical benchmarks remains strong, in some regards, but isn’t as bearish as it was a few months ago.

Storage to Expand While Uncertainty Arises

Looking forward, late September and October injections are critical to replenishing storage inventories. Last year saw 566 Bcf injected into storage over a 5-week time period – translating to 113 BCF per week. If we juxtapose the 177 Bcf total for the past 7 weeks against the possibility of 100+ Bcf in the near future, we see just how volatile the market can be this time of year. Late warmth or early cold can each have impacts on injections into storage.

Analysts will be closely watching injections in the fall, as failure to meet last year’s numbers could start to amplify winter volatility. Prices seem low and stable right now and very well may stay this low. But there’s also a chance that volatility reemerges and has the opportunity for peaks in the next few months.