Natural Gas is a Contango Market, What Does That Mean to You?
Energy News Update: April 22, 2024 Natural Gas is a Contango Market, What Does That Mean to You? Natural Gasis
Energy News Update: April 22, 2024 Natural Gas is a Contango Market, What Does That Mean to You? Natural Gasis
Energy News Update: April 22, 2024
Natural Gasis the largest source of power for generation of Electricity; therefore, their pricing is highly correlated, which is why we focus on Natural Gas in our reports.
In our April 8th Energy Update we said the window of opportunity to secure rates at their lowest prices of the year will likely close soon.
Today’s report explains when a Contango market occurs and why Natural Gas’s present Contango market is further evidence the window of opportunity to purchase Natural Gas and Electricity with their prices near the lowest of the year is about to close.
To understand why, we must understand when a market is in Contango. A market becomes a Contango market when their forward contract prices are higher than its nearby contract.
When does a Contango market occur?
They occur when futures traders believe the short-term fundamentals supporting low prices are transitioning to long-term fundaments supporting higher prices. Fundamental analysis measures and predicts forces affecting the future supply and demand of a commodity.
In our Feb 26th Energy Update we explained why Natural Gas producers will be forced to cut production in response to today’s unsustainably low prices. Prices are unsustainably low when they decline below the cost of production, and producers respond by making strategic decisions to curtail production to support higher prices in the future.
This response was confirmed on Feb 21st when Chesapeake Energy in response to the recent plunge in prices, announced they were cutting the amount of fuel produced in 2024 by roughly 30%, and Natural Gas immediately reversed its decline to its lowest price of the year, and has formed a classic pattern of higher lows on pullbacks common early in a Bull Market:
The market’s response to this news was appropriate given Chesapeake Energy is expected to become America’s largest producer of Natural Gas after its merger with Southwest Energy, and reinforced when EQT presently the largest U.S. Natural Gas producer, announced it made the strategic decision to cut production by approximately 1 Bcf per day starting in late February. In response active gas rigs have declined to their lowest level since December 2021, down 33% from this time last year going from 159 active rigs to 106 active rigs.
Therefore, it is not surprising forward contract prices are higher than their nearby contract:
Month | 2024 | 2025 | 2026 | 2027 |
Jan | 3.77 | 4.56 | 4.89 | |
Feb | 3.61 | 4.35 | 4.67 | |
Mar | 3.24 | 3.81 | 3.97 | |
Apr | 3.04 | 3.43 | 3.46 | |
May | 1.78 | 3.11 | 3.47 | 3.48 |
Jun | 2.03 | 3.28 | 3.64 | 3.65 |
Jul | 2.35 | 3.46 | 3.81 | 3.82 |
Aug | 2.45 | 3.51 | 3.85 | 3.86 |
Sep | 2.46 | 3.47 | 3.82 | 3.82 |
Oct | 2.56 | 3.54 | 3.88 | 3.88 |
Nov | 2.96 | 3.85 | 4.18 | 4.21 |
Dec | 3.51 | 4.31 | 4.64 | 4.64 |
AVG | 2.51 | 3.52 | 3.95 | 4.03 |
The forward markets are predicting Natural Gas and correspondingly Electricity prices will move higher not only the remainder of this year, but in 2025 through 2027, and the window of opportunity to secure rates near their lowest prices of the year will likely close soon; therefore, if your present energy agreements expire in 2024 or 2025, we recommend taking advantage of this year’s historically extremely low prices, and reserve energy to be available when your present agreements expire.
We believe the empirical evidence in today’s report showing the forward market is now a Contango Market strongly suggests the average price will be higher long-term, and the upside risk is much greater than the downside potential of waiting hoping for slightly lower prices.
Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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