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Energy Market Update: February 2, 2021

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We often discuss market patterns like contango and backwardation - but what should energy and gas buyers actually do under such conditions?
 
In this week's Energy Market Update, Direct Energy Business Strategist Tim Bigler explores the latest NYMEX natural gas trends and whether now is the time to act.

 

At times, NYMEX natural gas futures behave unpredictably. At other times, patterns emerge that can be instructive to buyers. Currently, futures are behaving such that it may be a favorable time to buy for anyone with the ability to purchase on a long-term basis. This is because 12-month, 24-month, and 36-month NYMEX strips are currently in backwardation. In other words, the price of gas for the 12-month strip beginning in March 2021 and ending February 2022 is higher than the price for the 24-month strip beginning on the same date and ending February 2023. This 24- month strip is in turn more expensive than the 36-month strip ending February 2024. The further out the futures contract, the lower the price.

For anyone with the ability to buy on a timeframe longer than 12 months, this means that the further out your contract goes, the lower your total average cost could be, due to the market blending prices going down over the next three years.

Viewing the same March ‘21 - February ‘22 strip in the context of NYMEX calendar strips (which simply indicate the average price from January through December of a given year) suggests there’s more to the story. While backwardation is still in effect when it comes to the ‘22 strip (which is priced higher than subsequent years), the ‘23, ‘24, and ‘25 are exhibiting a tight grouping near the $2.55/MMBtu mark. Moreover, while the ‘22 calendar strip and aforementioned March-Feb 12-month strip appear to treat $2.50 as a price support, these later strips appear to be supported at $2.40.

What does this mean? From a risk standpoint, the fact that consecutive calendar strips are showing very minimal price separation suggests that the market may not currently perceive a great deal of risk - whether two, three, or four years into the future. For buyers who think this low-risk-premium state of affairs won’t last, a managed product could be the answer. The low cost of contracts in the back of the market may represent an opportunity for buyers with the ability to make longer-term investments.


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Posted: February 02, 2021

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