Infinity Insights - Volume 11, Issue 23
AT-A-GLANCE SUMMARY
NYMEX natural gas is making new highs in what appears to be the first bull market in years.
SUMMARY OF THE LAST WEEK IN CHARTS
Spot month natural gas (August) support is 3.40 with resistance at 3.80. Calendar year 2022 finds support at 3.00 with resistance at 3.20. Calendar year 2023 has support at 2.73 with resistance at 2.95.
Roadmap
NYMEX natural gas spot month (August) closed at $3.70, $0.18 higher.
Calendar 2022
Calendar 2022 settled higher by ≈$0.035 at $3.115
Cal 2023
Calendar 2023 ended ≈$0.01 up at $2.76
OUR TAKE ON THE MARKET
NYMEX Natural Gas
NYMEX natural gas is making new highs in what appears to be the first bull market in years. Open interest has climbed and indicators point to higher marks. Helping in this move is inflation, weather, and market bias (technical picture). Where prices will end up is a question whose answer will depend on circumstances to be determined over time. In the meanwhile, short positions are at risk.
It is noteworthy that spot NYMEX natural gas achieved its initial technical objective at 3.80. Prices may take a rest but we advise to not mistake a pause for a turnaround.
WHOLESALE POWER
ERCOT
Wholesale power in ERCOT continues to climb without significant pullbacks. Drivers are natural gas and heat rates, with heat rates at or near al-time highs:
As discussed in natural gas, above, there is nothing challenging higher values other than pauses that occur along the way.
LMP’s future price path has been an important question since the February 2021 price explosion. What had been an acceptable, calculated risk for suitable loads eroded into an unknown. Are we to neglect history because of fear of another price debacle? In order to try to clear the air and find rational answers, we created the above chart that plots monthly LMP and spot month NYMEX natural gas prices. This isn’t absolute proof of a correlation set in stone, but the directional price patterns do seem to be consistent IF you disregard price spikes (Three: August 2011, August 2019, and February 2021).
We interpret the data to show when natural gas prices move higher, so do LMP prices. This is directionally and varies in degrees. The point is that today natural gas is in the first bull market experienced since the rally that accompanied the housing bubble that burst in mid-2008. The expectation is that natural gas has upside potential and that, historically, LMP will shadow the directional bias (go higher), Historically, procuring via LMP (real-time) has been a function of having confidence that a 10% to 20% advantage over what the forward curve (fixed price) is at hand.
This pattern will continue in our estimation but not in a down to flatline, but rather in an upward trajectory. Translating this tells us that today’s fixed price may be above LMP but as the curve moves higher, so will LMP. Ergo, if you lock fixed today, the LMP price advantage will disappear if future-forward curve pricing moves higher.
We believe that if fixed moves higher, a LMP higher pattern will evolve. Every signal we find indicates higher prices are coming. Being short has become more challenging.
PJM
The strength of natural gas continues to pull prices higher.
Stay Safe!