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Energy Market Update: January 15, 2020

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We keep a close eye on the natural gas markets, but we don’t always talk about who’s making the moves that shape the market. Join Direct Energy Business Strategist Tim Bigler to find out what is driving today’s trends in this week’s Energy Market Update. 

Two weeks into the new year, it seems that 2020 is commencing the same way 2019 ended -- with near-all-time-low NYMEX natural gas prices. A calendar strip view (which averages the price of futures contracts across the 12 months in any given year) tells us that the coming years -- 2021, 2022, 2023, 2024 and 2025 -- are no more expensive now than they were at the end of 2019.

In a previous Energy Market Update, we noted that $2.40/MMbtu was apparently acting as a support price for these further-out contracts. For now, this continues to be the case, with prices for each successive year in the future becoming more and more expensive, the farther out they are.

Change is afoot, however, when it comes to the number of total open contracts for futures. For every futures contract, there is both a buyer and a seller; the 1:1 balance between these parties never changes, but the aggregate number of deals open at any given time is prone to fluctuation. This number has so far only increased this year, up from around 1.3M at the close of 2019 to 1.4M today. This indicates that while the $2.40 price support is holding, there are plenty of buyers and sellers willing to do business at that price.

The Commodity Futures Trading Commission (CFTC) disaggregates these contracts, allowing us to examine the actions of various groups of buyers. Importantly, there is a difference between how “managed money” (professional investors who conduct organized trading on behalf of clients) and “other reportables” (other large traders who aren’t managed money) are currently behaving in the market. The former happens to be sitting at a record net short position; in other words, “managed money” traders are willing to sell natural gas futures contracts for low prices. This behavior could be responsible for the low prices we’re currently seeing.

Obviously, if the managed money position changes, so could the market. In 2016, managed money went from net short to net long over the course of the year, which coincided with a jump in natural gas spot contract prices from less than $2/MMbtu to almost $4 by the end of the year. In 2020, with demand increasing and production decreasing, year-over-year, a turnaround by the managed money group could have the same effect on today’s market.

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Posted: January 15, 2020