Regulated Growth VS Unpredictable Expansion

Because of the substantial drop of oil and natural gas prices in 2020, producers dramatically reduced rig counts and the amount of gas distributed to the market. The decreased in supply was welcomed because it stabilized prices and storage levels. Last week, the Energy Information Agency (EIA) published the graph in Figure 1 showing the natural gas rig counts. The chart shows the drastic decrease of active natural gas drilling rigs in the largest gas-producing regions of the nation. Over the past six months there has been a reluctant increase of total rig counts, showing that producers aren’t willing to increase production due today’s market prices.

In general, the trend for short-term gas futures has been slightly increasing, even though there has been price volatility in the past few months. Price instability of the market can be seen below in Figure 2.  The chart shows how prices for 2021 have been traded over the past 18 months. The market prices for 2021 were resistant to change and remained firm around $3.10 per MMBtu, with months between July 2021 and March 2022 above $3.00 per MMBtu.

Figure 3 shows how prices beyond March of 2022 decrease significantly creating a sharp backwardation in the market. The prices are so backwardated that for all non-winter months for the years 2023 to 2025 are trading under $2.50 per MMBtu. All the winter months are being traded below $2.95, a very important discount that shows how futures will be trading over the next ten months.

Technically and fundamentally the market seems optimistic from a trader’s point of view. It looks like long term trends will be bullish with the pricing and they are showing a trend of increase across the forward curve, setting the balance for 2021 with increased highs and increased lows in the trading cycle. From a fundamental standpoint, the production is relatively flat, demand is rebounding, and the storage levels are decreasing, when compared to 2020 and the 5-year average, supply-demand appears to be increasing and reduction of supplies and inventory. All these factors indicate a naturally bullish market.

Since the market prices for March 2022 and beyond are essentially discounted, it is a good idea to take advantage of the backwardated market prices. Customers who have open gas positions ought to take into consideration the purchase of futures to capitalize on the positive market conditions while they are still available.

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