NATURAL GAS MARKET UPDATE
Nothing like a little Natural Gas Market volatility to set the stage for what could be a risky winter season
It took almost a year, but the natural gas market has finally waked up to realize there are two sides of any commodity market; SUPPLY & DEMAND. Since the 2018 natural gas storage build began following an extremely warm February, natural gas prices have languished in a trading range plus or minus a few cents of $3. As the injection season progressed and what once was a surplus in inventory turned into a deficit, all the talk was about record production and the market remained range bound around $3. Whenever one would express concern regarding a possible tight and possibly under supplied winter heating natural gas season, the universal answer was, “No worries, natural gas production growth is booming’. When the market finally established what appeared to be a beach head above $3 natural gas in early October, the market just yawned and wrote it off as normal seasonal speculation. Then came November and the first forecast of a prolonged cold snap combined with an east coast snow storm. The naturel gas withdrawal season is now upon us! Walla, since November 1, natural gas market price shot through $4 like a hot knife through butter and inside of a week challenged $5!. The high trade on Nov 14 was $4.92. What did I mention in the first sentence? Oh yes there are two sides to a commodity market. While the market was all googly eyed with the historic growth in natural gas production, the economy was booming, more nuclear and coal generation was being replaced by natural gas, LNG & Mexican exports were growing and the summer of 2018 was quite hot. Yes, demand was booming and week after week the supply deficit was growing.
Now, what do we do to manage budgets in the face of $4 or higher natural gas? First and foremost, do not panic. In the 30+ years that I have followed the natural gas market, I have never witnessed such a drastic move that wasn’t caused by a Geo Political or sever weather event. I would not classify a cold week in November as a severe weather event. What is happening here was best described in laymen’s terms by Eddie Murphy in Trading Places, “Everybody is panicking because they aren’t going to be able to get their kid a GI Joe with Kung Foo Grip”. I do not believe this move is sustainable in the short run.
Now that demand has finally been priced into the market and possibly over priced in as we all know when spooked, the market tends to over react, how do we manage our energy budgets? Well, if you have been following our blog, you would already have long term hedges in place and you can go back to sleep. Oh yes, a pat on the back is always much appreciated.
What to do if you have exposure to what could shake out to be the most volatile winter since the, “Polar Vortex” winter of 2015? Now that we have digested the bad news, there is some good news for those that have not hedged. Long term weather forecasts have recently been revised to reflect a warmer than average December & January. This needs to be priced into the market and when it does, I would expect priced to gravitate beak to the $4 level and eventually break below $4. When this happens, it will be time to begin to layer in some protection. At this point I would be focused on placing short term hedges. This is not the time to secure long term pricing.
As I end each and every blog article, I will close with an open invitation to reach out to NJGEC if you have any questions and don’t forget to request a complimentary review of your energy budgeting strategy.