October 7, 2020

NYMEX Oct 20 – Jan 21 Price Spread: Have We Seen This Before?

Jeff Bolyard, Vice President Commodity Strategy

NYMEX Winter Price Spread

Shoulder season natural gas NYMEX prices dropping in the last month or so of injection season while the heart of winter pricing holds steady (or increases) is not a new pattern. This is what the market does when storage is full, summer demand is over, and winter demand has not yet arrived. This frequent pattern causes the official “injection season” to decline (in this case, the October 2020 NYMEX contract), while the January 2021 “heart of winter” holds steady and the gap between the two contracts increases. The chart below shows this typical pattern where the spread hit a low of $0.608 on 8/27/2020 before ballooning up to $1.30 when the October contract settled last week on 9/28.

NYMEX prices

We have seen this re-run before and know how it ends. The first shot of cold comes at some point in late October or early November causing winter contracts to shoot up temporarily for a week or two, while the speculative books sell to cover their long positions, the fundamentals again take back over because the market realizes there is still enough gas in storage, production increases to get us through the winter, and pricing comes back down to reality, right?

In the prior three years of 2017-2019, dry gas production has shown significant year over year increases of +1.6 Bcf/day, +11.2 Bcf/day, and +7.9 Bcf/day, respectively. However, YTD production through August 2020 averages are down 0.1 Bcf/day and forecasts show September to December production to average a whopping 7.1 Bcf/day lower than the same months of 2019. In addition, the combined rig counts that are drilling for crude oil and natural gas have plummeted 70% from year ago levels, leaving little comfort that the market even has the ability to access incremental supplies should a normal winter or another Polar Vortex arrive.

No matter what actually occurs this winter, the variables leading into it are different from prior years. It is not likely that a re-run of what we have seen before will occur. The pricing trends leading into this winter may look familiar but the fundamentals setting it up are not. At a minimum, extreme volatility should be expected, especially in the spot markets, with monthly winter NYMEX settlements being at significantly higher risk levels compared to prior years. Once we are through the upcoming winter (April 2021) and looking back, it is possible for the 2019-2020 average of $2.18 to repeat, just not probable based on the current forward winter NYMEX price of $3.00, and what is lining up this winter.

If you have questions or concerns, please reach out to your contacts at Edison Energy for a discussion or send us an email at information@edisonenergy.com.

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