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Energy Market Update: November 10, 2020

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November’s warm weather has reshaped natural gas markets in a hurry, but it’s not the only factor affecting prices.
 
Join Direct Energy Business Strategist, Tim Bigler for a comprehensive breakdown in this week’s Energy Market Update.

 

 

Factors to Watch

Anyone who has a contract renewal coming up in December or January should keep a close eye on natural gas markets. Why? Observers will have noticed that this month, natural gas futures declined in price at both NYMEX and Northeast basis. Specifically, 2021 calendar strips - both NYMEX and Northeast basis - came down from recent highs in the first week of November, thanks to a combination of factors.

First, it’s important to note that regional natural gas storage has been high. Taken in aggregate, storage levels across the nation are high, with relatively little available storage space left. But in the eastern U.S., storage levels are particularly high, with many facilities at maximum capacity.

Second, production isn’t high everywhere. While dry gas production in the northern U.S. has surpassed 2019 levels as producers capitalize on high prices, production in the southeast has remained significantly below last year’s levels due to the effects of hurricane season. And in the West, where oil prices have crashed due to the pandemic, gas has taken a concurrent hit as the Permian shale basin has suffered reduced output. This means that net supply is below last year’s levels and could continue to act as a price support for NYMEX.

Third, above-normal temperatures are being observed across the eastern half of the country. According to NOAA, the heat wave may last through November 19 at a minimum, driving down prices. In the northeast, for example, next-day cash prices have dipped below $1/MMBtu and fell as low as $0.55 in some cases. If temperatures remain elevated, households and businesses will not consume as much gas as expected, possibly lowering prices further.

 

The Bottom Line

So, what is the complete picture? One week ago, we noted that demand for natural gas was up in October relative to the same month last year; combined with a major drop in y-o-y supply, this resulted in a net demand increase of almost 10 billion cubic feet per day. When it comes to the first week of November, however, demand is much lower than it was one year ago (thanks in large part to this month’s warm temperatures). Total demand has dropped even more than total supply, resulting in a net demand of more than 1 Bcf/d lower than 2019 levels. This represents a shift from last month, when new demand offset supply shortfalls.

It's clear that NYMEX natural gas prices have declined. This is true for both Dec ‘20 - Nov ‘21 12-month strips and 2021 calendar strips. Basis prices, however, are where the real savings may be. Recall that basis prices are the difference between the price in a given region versus the Henry Hub price. With some regions exhibiting much lower basis prices than we’ve seen this year, it may be the right time to consider a managed product or get in touch with your Direct Energy Business team to discuss potential strategies for the new year.
 

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Posted: November 10, 2020

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