This post by Jeff Bolyard, Principal, Energy Supply Advisory, will be featured in our upcoming July 2023 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To sign up for the Monthly Monitor distribution list, click here.
Every natural gas end use sector subjected to market-based pricing has seen highs and lows in the market over the past 12 months – from a 180-month high NYMEX LDS in September 2022 of $9.353/MMBtu, to a 36-month low LDS of $1.99/MMBtu just seven months later in April 2023.
During that time, the market has flipped from a backwardated price (lower in the forwards than the current) to a contango price (higher in the forwards than the current). Edison has been getting more questions about this shift and the general volatility of the gas market in recent years, but more so over the past few months.
The chart below shows what one could have purchased in NYMEX Calendar 2024 and Calendar 2025 forward strips of natural gas over the past 16 months. Highlighted next to the orange star is the average NYMEX price for Calendar Year 2023 as of 7/7/2023, at $2.82/MMBtu:
While it is obvious that there was a major shift in the market during that period, the question being asked is, why? We went back to the energy headlines to explore what was fundamentally driving the gas market a year ago when prices were backwardated and on the rise in 2022 to compare against the lower price environment YTD in 2023 with forwards in contango.
The visual below indicates that there were three distinct periods that were fundamentally driven by changes in the market that literally flipped the forward price of gas, which helps explain the significant changes seen in the market recently.
Left Section – 2022: Global economies were supposed to be recovering from Covid, but Russia’s invasion of Ukraine left the world fearful of supply shortages and storage deficits. NYMEX gas prices rose to a 14-year high to average $6.64/MMBtu in 2022.
Center Section – 2023 YTD: After experiencing the warmest Jan/Feb winter month combination in 42 years, then layering on record high production, domestic storage flipped from a deficit to a surplus, plummeting near-term gas prices. With 7 months of NYMEX settlements behind us and the last 5 months of 2023 weighed into the average as of today, Calendar 2023 is at ~$2.82/MMBtu – $3.80 lower than 2022.
Right Section – 2024/2025: We know that incremental demand is on the way with LNG export facilities – 3 Bcf/day in 2024 and ~4 Bcf/day more by 2027 – all of which is currently under construction. While storage is in great shape for the upcoming winter, it can’t get beyond the 100% capacity that exists as long as the upcoming winter weather is still an unknown. Other questions that are not yet answered: Will the economies of the world recover, and how quickly? Will election results push faster towards a renewable transition, or will it be slowed to a crawl?
While near-term prices are relatively attractive in 2023, unanswered questions currently in the market are posing significant upside risk with limited downside potential into the future, placing a premium in the forwards.
If you are unable to handle the risk of future prices swings, put some level of protection in place while keeping in mind the words of British economist John Maynard Keynes: “Markets can stay irrational longer than you can stay solvent.”
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