During the month of February there has been a steady downward fall in natural gas spot price (Henry Hub), however is this fall in price will be repeated during March? Let’s see the main factors affecting natural gas prices to figure this one out…
To that end, let’s review the current conditions of the natural gas market:
Natural gas spot and future prices
During the month of February there were two main characteristics to the spot and future prices (Henry Hub):
- Natural gas spot price and future price declined precipitately during the month by 14% and 7.8%, respectively, and their average prices also fell compare to previous month of January by 9.1% and 10.2%, respectively (see table below);
- There has been a shift in spot/future price ratio in which at the beginning of the month spot price was higher than future price and now it’s the other way around (see chart below);
Here are a table and chart that shows the abovementioned claims I made:
The table above shows the changes in average prices for natural gas prices in the last few months.
The natural gas price chart below shows the changes in natural gas spot and future price (daily prices) during February.
Also notice the red line, which is the difference between the future and spot price during February. At the beginning of the month there is Backwardation (spot higher than future price) and since February 23rd there has been a shift towards Contango.
Usually there is a Contango when future price includes additional costs above spot price e.g. interest rate. It also may indicate that the market prices the future more than the present, i.e. natural gas spot price in March will increase compare to February.
Let’s see what happen during February to explain this speculation:
As the cold winter subsides and the snow storms depart many parts in the US, there is some aftermath to consider; from the demand side, it’s simple to see an ongoing fall in consumption; from the supply side, however there is some residual effects left: in particular the extreme cold weather, mainly during the first week in February, led to the biggest non-hurricane natural gas supply disruption in the United States in the past several years.
Domestic production of dry natural gas declined due to freeze-off of equipment and maintenance repairs performed in West, Mid-continent, and Gulf of Mexico regions; the weather also caused disruptions including processing plant shutdowns, pipeline failures and electric power outages. Some estimate the production of daily natural gas had declined from 62 billion cubic feet per day (Bcfd) to less than 57 Bcfd, an 8% decrease.
As a result, natural gas storage declined to a year low of 1,830 Billion Cubic Feet – the lowest level since May 2010.
Therefore it could be that the recent rise in natural gas future price over spot price might be an indicator of investors’ concern over the fall in natural gas supply. Nonetheless, there is still a downward trend in natural gas prices…
Finally, in the table below are the average historic prices of natural gas (Henry Hub) between 1998 and 2011. The current average price of February (up to date) is 4.09$/mmbtu which is lower than the average price in February during 1998-2011, which is 4.452$/mmbtu. On the other hand, there is a fall in prices during March of 3.7% compare to February.
Therefore, if I would to speculate, based on the figures above, if there will be consequences to the recent fall in production, in such that the drop in consumption will not match the fall in production, this might put some pressure for natural gas spot price to rise during March. This, however, is less likely and we should probably be seeing an ongoing drop in natural gas prices, as the winter departs the US and consumptions continue to fall. Nonetheless, the gas prices, if they will decline, will do so very moderately in the next several weeks to come.
For further reading (in this site):
- Weekly outlook for Crude oil, Natural gas and Gold 28 Feb – 4 Mar
- Natural gas prices outlook for February 2011
- How related are the consumption of Natural gas to its price – Examining Natural gas
- Is it the season of the Natural gas prices rise? – Examining the seasonality in Natural gas prices