Special Report: What about Natural Gas?

What About Natural Gas?

2020 has been a trying year, to say the least. Spot-month natural gas pricing has doubled from the levels of summer. 

Drivers have been various, with seasonality and the prospect of winter leading the way. We have discussed the advisability of locking prices (instead of floating on the index):

July NYMEX natural gas rolled into spot position with June’s expiration. Prices were defensive and perhaps an indication of a contagoed market moving towards the continuation chart’s support at 1.60.

This pattern is limited to the balance of Calendar 2020. Beginning in 2021, a different picture is painted, one that is constructive with indicators supporting a move higher over time. The implication continues to be procurement locks are a good way to manage risk.

Infinity Insights-Volume 10, Issue 21

While spot-month pricing is not the value for locking natural gas, it is an indicator of the market sentiment. Longer-term strips (average of consecutive months’ price, commonly quoted in the calendar year, January through December). The look of these values depicts prices on the rise, slowly and methodically moving higher:

Looking at the first 5 calendar strips charted together gives the following picture:

A table of values tells us that the prices are “backwardated,” meaning that each successive year trades discount to the previous:

The importance of this “backwardation” is, as is true with power marks, the longer-term locked captures lower price averages. If you are in agreement that the prospect of higher prices are to come or that you don’t know but want to avoid surprises, why not let someone else wear the risk of index prices moving higher, and lock.

The downside is missing lower price opportunities. We believe that boat has sailed. Prices under $3.00 are inviting and not that far from all-time lows. It is possible to see 4 handles on a price somewhere down the road.