November Volatility

Nov 20 2018

Expect High Volatility All Winter Long

Since the start of November, the natural gas futures index on the NYMEX has shown incredible volatility. Now up 60% YTD, the natural gas futures are having a rocky relationship with weather forecasts across North America.

The root cause behind these massive price swings up and down appears to be the looming shadow of a possible natural gas shortage this winter. On Thursday last week, the EIA released its weekly storage report, showing a net injection of 39 Bcf, which was higher than the estimated injection rate of 31Bcf. The report sent natural gas futures prices tumbling down from $4.70/MMBtu to around $4.00/MMBtu for just 2 days, before a cold weather forecast sent prices spiking back up to the previous levels. These pricing swings show the great tug-of-war currently underway in the market. One side points to record production levels for reasons why the price of natural gas is artificially inflated. The other side points to the terrifyingly low storage levels, sitting at 15 year lows for this time of the year. Those storage levels are made even more concerning going into the winter of a year that has seen highly unpredictable weather patterns.

 

 

Both sides of the debate will be using weather reports and storage reports to pull the prices in either direction on a daily basis all winter long. This makes it very difficult for anyone to determine where the market will end up when the warmer weather comes in. A mild winter will see prices dip back down toward the $3.80/MMBtu range, while a colder winter that draws much of the available storage could spike spot prices as high as $8/MMBtu, as seen in the winter of 2014, when the polar vortex drained natural gas storage to record lows.

 

Businesses that are on system supply with their local utility are not in the clear, either. While the utilities in Ontario only update their prices every quarter, they will be playing catch-up in early 2019 after they supply natural gas for a loss over the next few months, having locked in their prices in October. As always, they will incorporate the Gas Cost Adjustment to tweak their past prices, and cover their costs. In addition, we are forecasting that they will adjust their prices much higher in the New Year, as storage levels rebuild from extremely low levels, as seen following the winter of 2014. In 2014, Union Gas bumped their prices from 12.3 ¢/m3 of gas, up to 22.5 ¢/m3, with prices not recovering back to pre-2014 levels until April 2015.

 

Would you like to know what our market outlook is, and how we have prepared our client base for what we think will be an expensive winter? Are you on system supply with your local utility and want to know how to avoid a 2019 full of expensive gas? Send us an email at sales@ces-energy.com and we can start a conversation about how to best manage your natural gas portfolio for the upcoming year.

 

Sources: US EIA   Natural Gas Intel 1 2

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