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Energy Market Update: December 10, 2019

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Depending on where you live and who you ask, winter is either already here or on its way. And natural gas is doing something different this winter when compared to previous seasons.

Let Direct Energy Business Strategist Tim Bigler fill you in on the shift in this week’s Energy Market Update.

NYMEX often uses “strips” to bundle futures contracts in sequential months into a single transaction. A “calendar” strip can refer to a contract for 12 sequential months—or one year—and can be purchased ahead of time for certain commodities, like natural gas.

Given that it’s December and a new decade looms on the horizon, calendar strips for the years 2020 - 2025 may be worth a look if we want to uncover the current state of natural gas prices. Recall that each strip comprises the combined prices of futures contract (in $/MMBtu) for each of the 12 months in a given year divided by 12. In other words, each strip is an average of the price for every month in that strip’s year.

Calendar strips for the next five years (2020-2025) reflect a new trend in the natural gas markets. Production of natural gas is breaking all-time records across the United States, and this new supply appears to be tilting the market enough that the usual winter lift in prices is nowhere to be seen. The market seems to maintain a bearish outlook through 2025, with current prices at the lowest levels seen in at least four years.

When it comes to basis prices however, behavior varies from region to region. (Recall that basis price is simply the difference between the local price in a given location and the Henry Hub price.) California, New England, the Northeast and New York State are exhibiting elevated prices. On the other hand, (Western) Pennsylvania, Ohio, the Mid-continent, and West Texas are showing lower-than-usual basis prices, creating additional value for buyers in those markets. Because natural gas is playing an increasingly vital role in electricity production, cheap gas prices are also driving energy prices down in many markets (although California, New England and Texas are still seeing elevated power prices, for reasons particular to those regions). 

Taken together, NYMEX and basis prices paint a favorable picture for natural gas buyers in most regions. $3/MMBtu appears to be a new price ceiling for most strips, with a single spike late last year as an exception and reminder that patterns are indicative, but not definitive. Spikes and unexpected changes in the market are never outside the realm of possibility.

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Posted: December 10, 2019