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The Monthly Natural Gas Market Newsletter - May 2022

FireSide Natural Gas Monthly Report - May 2022

Natural Gas Prices


NYMEX June 2022 natural gas futures have maintained the recent trend of extreme market volatility. After opening as the prompt month contract at $7.395, the contract has traded in a $2.48 range. The contract has posted an intra-month high of $8.913 and an intra-day low of $6.43. The contract settled this week at $8.083 marking a 5.5% gain from last week's settlement. The June contract is set to expire this Thursday ahead of the Memorial weekend holiday. Some cooler weather is forecasted for several major consuming regions this upcoming week, but it's expected to be a shortlived weather event. It's very possible that the June contract could test areas near its recent high at almost $9.00 going into expiration. End-users with open June exposure shouldn't chance riding the contract's expiration price and should try and hedge that exposure early in the trading week.


NYMEX forward natural gas prices remain in a condition of backwardation. Spreads of current NYMEX pricing to deferred contract pricing continues to increase. Bal Cal22 is currently trading at a $2.544 premium to prices for Cal23 and a $3.727 premium to prices for Cal24. Back in mid-February, these spreads were $.704 and $1.121 respectively. As near-term natural gas prices for the remainder of Cal22 still have some upside room to trade higher, it's very probable that as we get further into the year, prices for Cal23 and Cal24 could start to appreciate considerably amid this very fundamentally tight natural gas market. Long-term price risk mitigation strategies by end-users should be implemented to effectively manage exposure to the natural gas market.


Daily dry natural gas production averaged 96.2 BCF/day in April. This compares to 94.9 BCF/day in March and 92.4 BCF/day in April 2021. Daily natural gas production continues to gradually grow in the lower 48. With weather no longer impacting well performance in the major shale regions, it's expected that daily production will continue to trend higher over the coming months. Even though production increases in April outpaced the growth in demand for natural gas during the month, production has failed to keep up with skyrocketing prices. Many of the top, publicly traded, E&P companies continue to "stay the course" on their commitments to return capital to shareholders and paydown debt instead trying to catch the price run and bring on more supply. The natural gas rig count is still ticking higher. The latest Baker Hughes report indicates that there are 149 natural gas rigs in operation. This is well above the rig rate from last year at this same time which was at 99 rigs in operation. But this still might fail to translate into a meaningful increase in daily production rates. The oilfield services sector, like many industries, is dealing with bottlenecks from supply chain issues. Also, the drilled but uncompleted (DUC) well rate is at its lowest reported level in over 10 years. The replenishment of these inventories also is key factor in why a rise in the rig count is not necessarily increasing daily production rates. Shale wells are much more shallow than traditional gas wells. This means that they start to produce less gas at a much more quickly. E&P companies must bring on new wells to keep existing flow rates consistent. Daily production levels will continue to be a very closely watched aspect of the gas market.


The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the US futures market. The report is compiled and published by the Commodity Futures Trading Commission (CFTC) and the report is designed to help the public understand certain dynamics of various commodity markets. There are two major classifications of traders: Commercial and Non-Commercial traders. Commercial traders essentially are made up of businesses that are looking to hedge exposure to the natural gas market. Non-commercial traders, also known as Managed Money traders, are speculators whose primary goal is to profit on trading and have no intent on using natural gas in any business endeavors. Managed Money traders buy long positions if they feel that prices will rise as they will eventually sell those positions to make a profit. These same traders will sell a position short if they feel that they can buy back the position at a lower price and thus make a profit. Natural gas market price volatility has historically been linked to how Managed Money traders position themselves in the market. Managed Money open interest shows periods of declining open interest for both long and short trading during some of the biggest price moves. Bullish price moves were associated with larger decrease in short interest rather than increases in long open interest. Bearish moves in price were associated with larger decreases in long open interest rather than increases in short open interest. But as natural gas prices have soared to their highest level in over 14 years, both long and short interest for managed money traders have declined. Rising margins required to trade NYMEX futures are a contributing factor of this decline. The decline in open interest means reduced liquidity in the natural gas market. Reduced liquidity can lead to extreme price movements which could be very bad for today's natural gas market.


Natural gas storage helps "balance" the US natural gas market. The highest level of gas ever recorded in storage was back on 11/11/2016 at 4.047 TCF. The US market now considers near 4.0 TCF as the new "normal" for adequate levels of gas storage entering the winter heating season. Inventory levels reached 3.958 TCF last November. Storage exited the 2020/2021 heating season at 1.750 TCF. Natural gas storage ended the 2021/2022 heating season at 1,382 TCF. Current storage levels are at 1.732 BCF. This is 17.1% below year ago levels and 15.2% below the previous five-year average. In April, 216 BCF of gas was injected into storage. This is 29 BCF higher than for April 2021. As the supply/demand balance for natural gas continues to tighten, traders are looking at how storage might look for the upcoming 2022/2023 heating season. Based on current supply and demand models, storage is on pace to enter next heating season at only 3.2-3.3 TCF. This would be considerably lower than most market participants would feel comfortable with. Weather variability between now and the end of summer will be a key driver on where storage inventory levels ultimately end up. Any prolonged periods of heat could severely impact current end of injection season estimates since so much natural gas is used by the power sector to generate electricity to meet cooling demand.