On Thursday (September 17) this week, near-term gas prices took a dive, but 2021 held firm.
The day started with disappointing weather forecasts. Then a surprisingly large build in natural gas inventories was announced by the EIA. Prices kept sinking afterward.
But not all prices did.
The weakness was confined to the front of the curve. The chart to the right shows the changes from last Friday’s settle versus prices mid-morning a week later. Inclusive of yesterday’s drop, the only tenors greatly affected were October and November 2020.
Beyond November, the price move was dampened. December 2020 only sank 4c. The Summer 2021 strip dropped less than that.
This price drop had all the hallmarks of storage containment issues.
Usually, the first week of November marks the point when most natural gas storage facilities switch from injections (storing the gas) to withdrawals. If there is not enough space to store gas in October-November, then there is potentially far fewer buyers for gas.
However, once withdrawals begin across the country, and weather turns colder, there is enough demand to easily dispose of all supply. The concern expires with the November contract, so to speak.
Therefore, if there is concern of the adequacy of gas storage capacity, weakness should hardly affect winter-time prices, and that is what occurred.
We were encouraged by this price action. It may seem counter-intuitive, but because winter prices were insulated during this price weakness, it is implied there were few traders worried about winter pricing.
We believe the U.S. gas market will tilt toward under-supplied this winter and through Cal ’21. See our recent discussion here: Mild Weather Could Thwart Otherwise Bullish Gas Fundamentals.
Winter and 2021 prices are holding their value, so far. Mild weather can ruin any rally, but it shouldn’t take too much cold to generate some (bullish) concerns over supply once December arrives. -MM