Markets are “very nervous” about soaring natural gas prices in winter

Colder-than-normal temperatures could trigger extreme upward volatility in natural gas prices this winter, industry experts say.

In a webinar hosted by Refinitiv and NGI on Tuesday, a panel of experts said many factors have converged to create a much tighter market than what is normally seen at this time of year.

“I’ve traded 25 years… and we’re entering a winter that presents the highest bullish tail risk for prices I’ve seen in all my years in space,” said David Dutch, vice -President of the business development of NGI, during the discussion of the current state of the gas markets.

Dutch shared the virtual scene with Leticia Gonzales, NGI’s chief price and market editor, who agreed that “this doesn’t look like a normal winter”.

Gonzales pointed out that NGI’s future outlook Henry Hub Winter Track prices were $ 5,415 / MMBtu as of September 17, up from $ 3,030 at the same point last year – and that’s just the start.

Cheeky prices at Algonquin Citygate, the benchmark for gas consumed in the Northeast, were $ 18,792 for January and $ 18,030 for February as of Tuesday, September 21. “It’s already an incredible number this time of year,” said Dutch.

The Northeast is not alone. Gonzales noted that the price of winter strips at the Waha hub in West Texas is more than double what it was around the same time last year.

Conditions are just as tough in the Midwest, said Shuya Li of Refinitiv, another panelist, who is a senior analyst for natural gas research.

So, what gives?

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For starters, North America has just had a summer that saw stronger than expected cooling demand. In addition, upstream capital discipline by the exploration and production sector, growing demand for liquefied natural gas (LNG) and pipeline exports, and extreme drought in the West have all contributed to a decline. rising prices and a shortage of storage before the fall shoulder season.

Gonzales explained that winter gas at Algonquin Citygate has already been rated at levels approaching parity with European and Asian benchmarks, since New England typically has to import LNG when temperatures drop.

So if the cold weather hits New England, “and you already have these pipeline constraints … then you’re going to see even higher prices in that area,” Gonzales said.

High prices in Waha, meanwhile, are linked to strong demand for exports and power generation, as well as events further west. Gonzales noted that Waha takes price signals from various downstream demand markets.

One market in particular, California, has been ravaged by drought and historically low water levels in the Lake Mead Reservoir, limiting hydroelectric production in the region.

Prices for SoCal Citygate’s winter strips were $ 11,194 as of Sept. 17, up from $ 4,222 at the same time last year, Gonzales noted.

Bullish signals

Gulf Coast LNG, meanwhile, is “basically the silver” compared to European and Asian benchmarks, Dutch said.

With Dutch Title Transfer Facility (TTF) and UK National Balancing Point (NBP) prices at record highs and European storage levels well below historical averages, US LNG “very likely remains in the money in these markets.” all winter, unless it’s really cold in here. and we have to assess the price, ”he said.

Adding to the market stress is a reduced ability for other thermal energy sources such as coal and nuclear to absorb the demand for electricity under a high price scenario, Li said. She noted that much of the capacity for coal and nuclear has been or will soon be phased out.

Dutch agreed, saying “we can’t rely on the switch from gas to coal like we could in other years.”

Renewable energy has made up for it somewhat, said Dutch, “but the sun has to shine and the wind has to blow … so that’s a question that’s hard to count on.”

Another bullish signal, said Dutch, is that “the Henry Hub and almost all of our basic winter curves are offsetting towards the outgoing winters. When you pull back like that, it is an extremely bullish signal that people are very nervous about prices over the coming winter.

Dutch said the only significant bearish factor on the horizon for prices is the prospect of some replenishment in storage levels during the fall shoulder season. The two things “that can really take winter down” are increased natural gas production and above-average winter temperatures, he said.

Traders will need to closely monitor the number of rigs and production levels, LNG exports and European gas prices, Dutch said.

The biggest wild card, however, will be the weather.

“When the weather gets cold, the upward volatility is going to explode completely,” Dutch said. He indicated that two months ago a majority of natural gas traders had taken long positions, but now the split between long and short is closer to 50/50.

“This tells you that a lot of traders have already taken profit, and a lot of people don’t know what to do with this market so high until the shoulder season before winter.”

The best option for bulls to protect against tail risk is to buy out-of-the-money call options for the winter months, Dutch said. Bears, on the other hand, can buy out-of-the-money put options.