The NYMEX Natural Gas Futures Market
End users on variable rates should certainly be paying attention to the volatility and the doings of the prompt month. The core component of the variable rate is the monthly price of the commodity, which means that end users on variable rates almost certainly saw their per unit rate increase each month this winter from November through February. That price will drop slightly in March, but will still be higher than all other months except February. On the other hand, customers on fixed rates will not see per unit price changes, as they set their rate ahead of time. This strategy certainly paid off this winter and the forward looking question then becomes what to do about next winter and the winters beyond that. Should end users be locking in next winter now following last week’s sell-off and in anticipation of storage possibly dropping below 1 TCF?
The graph below shows the forward prices for the next year (red), the next three years (green), and the next five years (purple). The one year price has been far more volatile than the other two curves and even after last week’s sell-off still remains above $4.50. While that may wind up looking like a good price for the coming year, recent history suggests that $4.50 is still expensive for the one year strip average. On the other hand, the graph shows that the five year average is trading almost exactly where it was at the start of 2013. Considering this winter demonstrated that volatility does still exist in natural gas and that the five year price is more attractive than one year, end users should strongly consider looking for long term fixed price opportunities.
While the supply outlook is very strong with the abundance of local shale gas, this country is looking for any which way to utilize our natural gas.
That means anything form more power generated by natural gas to more cars running on natural gas to more exports of natural gas into markets willing to pay a premium. Simply put, the supply and demand picture for natural gas in the US is a hot topic and one that is very much unsettled. With long term NYMEX prices as low as they are, the downside to hedging at current rates seems minimal compared to the potential upside.
One of the major impacts emerging from this historic winter is the volatility in basis prices in some key markets. In short, basis represents the locational value of gas at a specific location compared to the Henry Hub in Louisiana. The top graph shows the monthly basis prices for a few markets and illustrates how expensive gas has become in Chicago and Michigan specifically. End users on variable rates that do not have basis locked in may be exposed to basis prices that we simply have not seen before and are encouraged to monitor their gas bills closely.
Similar to what we are seeing on the NYMEX, the basis moves also suggest that long term hedges may make the most sense. The bottom two graphs to the left compare a one year forward basis and a three year forward basis for each of four markets. In all four markets, the three year basis is currently cheaper than the one year basis, even though a year ago they were equally priced. In Chicago and Michigan, this is especially true, as the one year basis in those markets are now about 30 cents while the three year basis is closer to 5 cents. Simply, the marketplace sees a higher basis risk in the upcoming year than it does multiple years in the future. Considering the discount in NYMEX and basis prices for longer terms, we advise all end users to actively research and strongly consider long term fixed rates and/or long term basis hedges.