This post by Jeff Bolyard, Vice President, Commodity Strategy, is featured in our recently released October 2021 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To read the full newsletter, click here. To sign up for the Monthly Monitor distribution list, click here.
On Tuesday, September 28, the NYMEX October natural gas contract ceased to be a future contract. Anyone with a market-based NYMEX contract will be feeling the sting of a $5.841/MMBtu price–the highest October settlement since the financial meltdown of 2008. Over the past 60 days, the November 2021 – March 2022 winter strip has increased $1.71/MMBtu and is currently trading at @ $5.75/MMBtu (chart below sourced from Bloomberg).
Some may have been surprised by the recent developments, yet there were definitive signs that this was coming. Let’s briefly review how we got to this point.
In 2020, the NYMEX Henry Hub monthly settlement for natural gas averaged $2.077/MMBtu–the lowest annual average for the U.S. benchmark since 1995. This low point in gas prices was induced by a combination of several things, including COVID-related demand destruction, a crude oil price war which pushed the price of oil futures to negative $34/barrel on a single day (the first time ever below $0), and a global surplus of both crude oil and natural gas last year.
The logical reaction to these plummeting prices from the producer community was a flurry of significant capex reductions in an attempt to conserve the limited amount of cash available at these prices. This severe and immediate reaction from the producer class could be easily seen by a drop in the number of drilling rigs searching for crude oil and natural gas throughout most of 2020, which is still significantly below pre-Covid numbers and has not fully recovered.
There are just 521 active rigs currently looking for gas and oil in the U.S. for the week ending 9/24/21, which is 272 rigs below where we were at in March 2020. Added to this is a year-over-year and five-year average storage deficit that has been known since April and is still 575 Bcf behind last year. Add the decline of legacy wells into the limited number of new wells brought on this year and we can see that net production has been flat for the past five months. Apart from February–when Winter Storm Uri took demand down temporarily–LNG exports have averaged 10.8 Bcf/day to date, which is 3.5 Bcf/day higher than in 2020.
While we may have been surprised at the speed at which this market has recently risen, warning signs were evident throughout the year that this wasn’t only possible, but probable. The severity of winter weather should now determine how much higher the market could go–which could be significant–and how long these higher prices will last.