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Energy Market Update: November 3, 2020

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With the pandemic’s initial effects now waning, what will the end of the year bring for natural gas markets?
 
Direct Energy Business Strategist Tim Bigler analyzes the latest indicators in this week’s Energy Market Update.

 

Rebounding Demand

The natural gas supply/demand balance across the U.S. has changed over the last year. Last month, total U.S. gas supply (including all gas imported from Canada) was observed to have declined by almost 8 Billion Cubic Feet per day (Bcf/d), relative to October 2019 levels. At the same time, total U.S. demand has increased by close to 2 Bcf/d. This means that net demand has increased year-over-year by more than 9 Bcf/d. October is not typically a high-demand month for natural gas or power; this suggests that external forces, rather than seasonality, may be driving these market movements.

One factor likely driving this surge in demand is the Liquefied Natural Gas (LNG) export market. Demand for LNG exports dropped dramatically during the early months of the pandemic but has rebounded to almost-pre-pandemic levels. In addition, demand is expected to increase further as the Train 3 in Cheniere’s Corpus Christi facility is brought fully online in 2021. Gas exports to Mexico have also risen to near record levels. So, it is important to note that rising demand for gas exports has acted as a significant support for overall demand in the natural gas markets.

 

Market Movers

For every futures contract, there is a long position and a short one. But who is long, and who is short on natural gas? The “managed money” sector of the market, who are considered speculators, were net short -- record short, in fact -- on gas toward the beginning of this year. As the year went on, the managed money position changed, and despite the pandemic is now net long on gas. Interestingly, this swing has coincided with climbing prices for both the 2021 NYMEX calendar strip and NYMEX natural gas “spot price.” Speculative influence may not be the only force driving prices higher here, but it cannot be discounted and may suggest higher prices if net long positions persist among speculators in the market.

So what should we expect from the markets going forward? Looking at NYMEX calendar strips, the market is in a clear state of backwardation at the moment -- meaning that current prices are higher than prices in the futures market, and the farther out a futures contract goes, the more it is discounted (generally). 2021 and ‘22 calendar strips have spiked over the last month, separating from subsequent years. If current market conditions hold, it is possible that ‘23 could follow suit, making ‘24 and ‘25 futures contracts the only affordable alternatives for buyers with a long-term mentality.

Buyers should note that backwardation is a good time to take advantage of savings via a managed or fixed product, and that these conditions could change quickly given the volatility of the markets so far this year.
 

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Posted: November 03, 2020

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