Energy Market Trend for April-May 2013

A month ago NYMEX futures broke out of their range and exceeded $3.60 per MMBtu for the first time in four months.  A month later those prices look like a bargain as prompt month gas futures have broken $4.20 for the first time since July 2011.  Why?  The primary reason was the weather as March was COLD.  Heating demand depleted storage inventories to levels not seen since the last time that gas was over $4.10 – no coincidence there.  But the long-term picture is a bit different and not as grim.   Gas futures for 2014 are up significantly less than the near-term and 2015 and 2016 are down.  The bottom line is that the rally is being driven by near-term fundamentals while long –term prices have stabilized thanks to shale reserves resulting in a much flatter forward curve.  The detail is in the numbers below:

Prices as of 4/12/13        Change since 3/7/13

Prompt month natural gas           4.22                                        +0.64

12-Month Strip                                 4.37                                        +0.52

Calendar 2014                                   4.26                                        +0.15

Calendar 2015                                   4.27                                        -0.03

Calendar 2016                                   4.36                                        -0.09

($ per MMBtu)


Details on the Fundamentals:



The short story is that we had a winter this year while last year we did not.  Although nowhere near record cold, it was dramatically colder than the record warm winter of 2011-12.  And March was especially cold while last March was especially warm, so winter’s last gasp resulted in a strong surge of demand and storage withdrawals that stoked the market rally.  So now the market can breathe for a month and get ready for summer.  Early forecasts are calling for above normal temps as well as an above normal hurricane season.  But temps are tremendously difficult to predict this far out and storm direction is more important than count.  So for now, summer should be categorized as a critical and imminent point.

Natural Gas Storage :

The impact of weather on gas demand and gas prices is very evident through the trends in natural gas storage.  Over the last month we have seen the culmination of the gradual deterioration of the huge natural gas storage surplus that peaked in April 2012 at the same time that prices hit 10-year lows.  Storage inventories are now far below levels from a year ago and even below the 5-year average.  Here is the data:  current inventories equal 1,673 Bcf which is 804 Bcf or 32.5% below a year ago and 66 Bcf or 3.8% below the 5-year average.  The reduced inventories will result in additional summer gas demand to refill storage reservoirs in order to prepare for next winter.  This increase in demand pushes prices up for this summer and the possibility that we will go into winter with reduced inventories has increased prices for next winter.  But storage has limited impact on prices for the beyond next winter and this is a key reason that prices for 2015 and beyond have not been part of the recent rally.


Despite the rally, shale gas remains the dominant factor in natural gas prices.  Prices plummeted from 2008 to 2012 while crude oil prices eventually rebounded after the global recession.  And limits to recent price upside and the stickiness of long-term prices have clearly been partially attributed to the enormous shale gas reserves in the US.  At the same time, when the market found a bottom in 2012 and rebounded, one cause was producer reaction to low prices.  The market was just too low and drilling economics are likely to limit both upside and downside in prices for some time to come.  So while production remains strong, it has declined by close to 1 Bcf/day since the peak last November – an indication that producer did react to low prices of 2012.  But new estimates of US recoverable gas reserves were just increased by 20% to 2,384 (close to 100 years of supply at current usage levels) by the Potential Gas Committee, primarily driven by updated data for shale in the Eastern US including the Marcellus.  Although the economics of much of these reserves is uncertain, the amount certainly limits price upside.

Other Factors:

There are numerous other factors driving prices and most remain unchanged.  EPA regulations and LNG export both are highly likely to impact gas demand as soon as 2015.

In addition to impacts of trends in the NYMEX, both regional gas basis and regional power issues are driving power prices:

  • New England – winter gas basis volatility remains a hot topic with forward prices remain elevated as supply challenges due to pipeline constraints and reduced LNG imports expected to continue for the next several years.
  • New York – gas basis will get some relief thanks to pipeline expansions.
  • PJM – this market has seen the least volatility due to impacts of Marcellus shale, but capacity prices are changing significantly and are much higher for some parts of the ISO.
  • ERCOT – summer is around-the-corner and so are concerns about adequate reserves and risk of hitting the higher price caps.  Summer prices and heat rates are high.
  • California – Cap & Trade regulations have changed the market and uncertainty regarding generation from the San Onofre Nuclear Generating Station (SONGS) have ended California run of consistently low prices.

Market Outlook

The first question that we can answer with high confidence is that a repeat of the spring dip of 2012 is very unlikely to repeat.  The change in storage inventories from surplus to deficit is enough to prevent any such market crash.  Beyond storage, the market is “smarter” in 2013 by knowing the price points that require changes in supply and demand.  Power generator and gas producers behaviors have limited both upside and downside in the market.  This limits upside risk and this is apparent as long-term prices have stabilized, but also reduces chances for a big dip.  And the result has been an end to the seemingly never-ending prices declines from 2008 through 2012 and a flat price curve.

So what will trigger price spikes or buying opportunities?  Weather is critical as always, so watch out for the impact of summer heat and hurricanes.  It will be interesting to see whether producer activity picks up due to rising near-term prices.  And consumer demand from the industrial sectors has increased due to the US’s low natural gas prices compared to abroad.  The net effect is apparent in storage activity.  And key an eye on regional gas and power fundamentals and heat rates – watching the NYMEX alone is risky – ask customers in New England after last winter.

For the long-term, EPA regulations, LNG exports, Natural Gas Vehicles and the US economy will remain key drivers of the shape of the forward curve.

Fixed Price Customer Considerations

  • It is very difficult to buy in a rally and many customers are certainly frustrated as they have been waiting in vain for the supposedly “inevitabledip that the spring would bring.
  • Overall, higher prices are inevitable for most. It is possible that a dip is forthcoming, but targets from a month ago must be revised upward because any downward move before will be limited by the storage deficit.  Summer brings both potential risk and reward – so have a strategy to deal with both possibilities.
  • Budgets with year-over-year rate declines may be unrealistic depending on the timing of your previous contract and can result in undue risk by setting targets that are unlikely to occur.
  • Short-term contracts are a strategy to buy time, but do not recognize the possibility that current prices levels will be sustained or could move higher.
  • And long-term prices may still present a good value as they have risen much slower than the near-term.  And the flat forward curve provides opportunity for stable prices.

Consider Layering your contracts

  • Although they do not provide an escape from higher prices, products that allow layering have significant advantage during period of price strength by allowing initial layers to be utilized to mitigate risk with subsequent layers being utilized to take advantage of market dips, if they occur.
  • Hedging strategies will depend on both market fundamentals and customer risk tolerance.
  • Be careful of using prices from 2012 to form price targets except for final layers.
  • Even aggressive customers should be executing layers for the upcoming layers.
  • And initial layers should be considered if not already in place for 2014.
  • Recognize that the flat forward curve may provide significant value for layers into 2015.
  • Utilize seasonal layers to address regional concerns such as winter gas basis spikes in New England and summer price spikes in ERCOT due to heat.

 Customer message:  The overall message is actually the same as a month ago except that prices are higher and likelihood of a big dip in prices before summer has declined.  And this may be difficult for customers to accept since may have had consistent year-over-year declines since the peak of 2008.

    • Year-over-year declines in gas have stopped with 2012 likely being the bottom.
    • Range-bound gas behavior for the near-term with modestly higher prices possible for 2014.
    • Regional fundamentals are causing significant regional risks that must be considered.  If you only focus on natural gas, you are exposed to significant regional risks such as New England winter spikes and ERCOT summer spikes.