Buying Strategies
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Compiled Feb. 25, 2010
Market Overview
The market has dropped sharply in the past month. After trading in a range of $5.25 to $5.75/MMBtu for six weeks, the prompt month contract (April10) fell rapidly and closed Feb. 25 at $4.767. Amazingly, this decline occurred amidst an extremely cold winter and a strengthening economy.
On Feb. 23, Calendar 2011 reached an all-time low of $5.80, Calendar 2012 reached an all-time low of $6.09 and Calendar 2013 reached an all-time low of $6.29, while in the same week, the 12-month contract closed at $5.35.
Increased energy consumption due to the extremely cold winter has had the effect of turning the year-over-year storage surplus into a deficit for the first time since December 2008. From the high of 3.837 tcf, which was seen on Nov. 27, 2009, natural gas storage inventories dropped to 1.853 tcf as of Feb. 19, which is 2.9 percent below a year ago. March storage is projected to drop again to around 1.45 tcf. This is still plenty of gas but it is well below last March’s level of 1.656 tcf.
Drilling activity is much higher and is one of the primary drivers of the recent bear market. Shale drilling activity is at an all-time high and is outpacing conventional drilling. The rig count has expanded sharply and now sits at 893, the highest since early March 2009.
Outlook
The market has largely shrugged off the extremely cold weather and the draw-down in stocks to reach record-low pricing. Many analysts are citing the sharp increase in rig counts as the primary reason behind the drop in prices. Strong LNG imports are also helping to fuel the bear market, with current levels at 2 Bcf/day. Expectations are that import levels will grow throughout the summer to a high of 3–4 Bcf/day. Expectations for higher import levels have helped push prices lower but if prices in Europe and the UK rally, imports to the U.S. could fall off and get redirected across the Atlantic.
Risks on the upside also include higher usage from gas-fired electrical generat2009 and had the effect of keeping a floor on prices. The cheaper the gas, the more coal displacement will occur—primarily in the southeast U.S. If gas prices dip below $4.00/MMBtu however it can become more of a widespread issue.
Fixed Price Buying Considerations
Many terms are at their all-time lows and are presenting excellent values. Risks remain however and could cause an end to the recent bear market. These risks include:
- The storage deficit could eliminate a buffer against supply disruptions
- The rig count could slow or drop in response to low pricing
- LNG imports could slow
- Gas demand could increase due to the improving economy
- Competition between coal and gas-fired electric generation could cause an increase in gas demand
Portfolio Buying Considerations
Current record-low prices are a reason to consider executing forward purchases, as there may be an opportunity to lock in a sizeable portion of your load at a rate that compares very favorably to previous years.
For businesses with a higher risk tolerance, spot pricing remains low while volatility can be a concern as we move into warmer months. With forward prices so low, a baseload hedge can provided relatively inexpensive insurance against market surprises. Similarly, the low price environment makes hedging attractive for the riskier months (summer and winter strips).
If purchases are deferred, establish specific target prices and deadlines based on recent market movements and your own specific price targets (budget, previous year costs, etc) and consider market risks, including extreme winter and summer weather and price correlations with broader markets.
As always, consider your budget and/or year-on-year comparison and consult with your Portfolio Strategist regarding the appropriate strategy for you.
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