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Dr. Ken Rietz A recent Bloomberg article pointed to an anomaly in the natural gas market. Specifically, after Hurricane Beryl, the January natural gas futures spiked dramatically in price relative to the October natural gas futures. I will also visit this anomaly, explain why it is an anomaly, and give an updated version of why the anomaly exists and then present a reasonable estimate of the price of natural gas in the near future. This will be another exercise in using spreads. First, here is a graph of the front month futures of natural gas. |
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Figure 1: NYMEX price of natural gas futures, from 2021 to present, in USD per million BTU. Source: EIA The graph of the front month futures is not very revealing. Prices are fairly low and track closely to last year’s prices. There is certainly no sign of any anomaly here. It isn’t until you look at the spread between the Oct 24 and Jan 25 futures prices that things become rather strange. Here is the graph of that spread. |
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Figure 2: NYMEX price of natural gas Oct to Jan spreads. Source: EIA Remember that the spread is typically calculated by starting with the price of the more distant future, and then subtracting the price of the nearer future. The spike in the price since early June reflects either a dramatic increase in the price of the Jan 25 futures or a dramatic decrease in the price of the Oct 24 futures. Taking a cue from the Bloomberg article, we look at the Oct 24 futures. Here is a graph of the Oct 24, 25, 26 and 27 futures.. |
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Figure 3: NYMEX price of October natural gas futures, from current to 2027, in USD per million BTU. Source: EIA The reason to look at futures that far out is to see the typical price action for October futures. No one has any idea what will be going on that far ahead, so the futures will reflect the typical price action. And it is clear that the prices for this October are way below normal and have lately been dropping unusually rapidly since early June. This same effect can be seen in Figure 2, where the spreads for Oct 25 to Jan 26 and Oct 26 to Jan 27 drift higher in unison, but the spread for Oct 24 to Jan 25 takes off, clearly an anomaly. Why are prices for Oct 24 dropping so much? The timing points to Hurricane Beryl, which did damage to the Freeport LNG export terminal. Freeport shut down the day before Beryl hit, and suffered some damage to their system from the hurricane, and are now back to about 50% of their capacity. Their normal capacity is 2.8 billion cubic feet per day (Bcf/d). The 5-year moving average for total US stored natural gas on July 19 is 2,752.2 Bcf, and the current value is 3,209 Bcf, up 16.6%. When Freeport was shut down completely, about 0.1% of the 5-year average each day was backing up in the natural gas system. That much natural gas accumulates very rapidly. And even with Freeport at 50% capacity, about 0.05% of the 5-year average is backing up into storage each day. We are clearly running a major excess, leading to the rapid drop in price of the October futures. Then why are the futures for Jan 25 not sky high? The market is clearly expecting that the natural gas system will be close to running normally by that time, or at least not adding to the stored amounts. And that is reasonable. So, what does all this say about the cost of natural gas for us? The dramatic increase in the stored amount implies that natural gas prices are likely to drop for several weeks at least, and then begin to climb back to more normal prices by the beginning of the year. |