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Energy Market Update: May 1, 2019

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How much can change in a year? One year ago, on April 30, 2018, NYMEX natural gas futures were going one way; today, they’re going another way. Could this create a buying opportunity? Direct Energy Business Strategist Tim Bigler shares his findings with us on this week’s Energy Market Update:

 

If you’d looked up NYMEX futures for natural gas a year ago, you would’ve found that prices, though responsive to seasonal changes, followed a gradual upward trajectory. Contracts for 2020 onward tended to climb higher and higher, with contracts for later dates costing more and more.

Today, those very same contracts (in an apples to apples sense) are following the same trajectory, but they’re holding at a lower price than last year until roughly 2025, after which they rise higher than the 2018 price. In other words: if you want to buy NYMEX natural gas futures contracts, you will get a better price today than you would’ve a year ago if those contracts expire before 2026 (in fact, today’s prices are near all-time-lows). If they expire after 2026, you would’ve been better off buying them a year ago.

What makes this relevant? The demand side of the equation tells us that US dry gas production has been stagnant in 2019. We are producing gas at a relatively high rate, but that is only thanks to the production growth of the last two years, which now has tapered off. Why? Fiscal and production discipline by gas producers could be to blame. Production in the Northeast, in particular, has been flat. The relevance, then, lies in ascertaining what the missing puzzle piece is between lower prices and stagnant production.

The Missing Piece

Taking eastern Ohio and western Pennsylvania as an example region, we can see that basis prices for natural gas futures (Again, NYMEX) shot up toward the end of 2018 and into early 2019. They have since leveled off, however, and have even declined a noticeable amount in the case of some years. This could be a direct result of the same fiscal and production discipline that has kept production levels somewhat in check; producers have taken a “wait and see” approach due to the potentially high costs associated with getting gas processed and made available at wholesale.

On top of this, prices are not currently high enough to incentivize producers to increase the gas supply, with near-all-time-lows in states like Ohio and PA. Some might see this as a buying opportunity, where prudent; the most we can say is that it’s worth a look.


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Posted: May 01, 2019

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