Natural Gas Market Update
October 3, 2016
Below we explore current market conditions for natural gas as a commodity. Basis (delivery to your location) is unique to each region and is omitted from the below analysis. Custom risk exposure models or market analytics can be run for your specific situation. Contact your representative or fill out our contact form. We also provide an Electricity Market Update, which may be of interest.
The most recent storage injection report showed a 49 BCF injection, which brings the total amount of natural gas in storage to 3,600 BCF. The injection season typically runs through early November, so we have approximately six weeks (maybe more) left before withdrawals start. Over the previous six years, the average injection for these last few weeks has been 477 BCF, with a minimum of 352 BCF. If we add those to our current injection level, we arrive at a conservative expected range for an end-of-season storage level: a floor of 3,852 BCF, with 4,077 BCF within reach if the weather cooperates and causes the injection season to be on the longer side.
How do these storage numbers compare historically? Last year, we set the storage record at 4,009 BCF. The previous record was 3,928 BCF set in 2012. So within our conservative range, it looks likely that we will beat the previous peak storage record and could even surpass the all-time record that was set so recently. Although the pace of injection this season has been a bit slower than last year, we should end this storage season well supplied for the upcoming winter.
How does the amount of storage impact prices? Last year, with a mild winter and record storage levels, energy prices plummeted. However, demand has increased since then, so we may not see as drastic of a response this time around. When short term prices drop, they tend to drag down prices for future months, often years into the future. We could see commodity prices through 2020 become even more attractive than they are now. At the moment, the strips for 2018, 2019, and 2020 are each below $3.00. The average gas commodity price since 2012 is $3.22. These next few weeks represent an opportunity to lock in budget protection at low prices for multiple years in the future.
That said, growing demand – especially from exports and as a fuel for the power sector – could put upward pressure on prices in future years. Extreme weather events, while rare, have caused prices to spike violently in the past. (Such as during the polar vortex, which hasn’t completely faded from memory just yet.) Markets don’t always recover as quickly as they panic, so there’s a chance that when 2019 comes around, sub $3.00 gas will no longer be an option.
Here is the price risk exposure for the 2017 calendar strip. This shows that the expected average price for 2017 is $3.11/Dth, with a best case of $2.45/Dth being within the 90% probability range. The worst case, within the 90% probability range, is $3.92/Dth. Overall, prices look really good now; they could become amazing soon or they might increase up to (or even move above) historic averages. Our recommended approach of layering hedges has been shown to be the best strategy to manage the risk inherent in energy commodities. We are happy to run custom risk exposure models for you. Simply contact your Hospital Energy representative or use our contact form to request exposures specific to your load profile and your budget. You may also find our Electricity Market Update of interest.