NYMEX and Basis Market Movement
The 12 month strip average for natural gas closed on June 14, 2014 at $4.643. Six weeks later, the same 12 month strip average settled on July 25, 2014 at $3.836, a staggering drop of over $0.80. The reason why is quite simple: an extremely mild summer has enabled storage to refill much faster than expected following the bitterly cold winter.
Storage injections over the past 12 weeks have averaged 103 BCF per week. That compares favorably to last years average over the same time of 84 BCF and the five year average of 78 BCF. Simply, the deficit to the five year average is shrinking 25 BCF per week over the past 12 weeks. And if the weather remains mild, then the deficit will shrink even more.
The next eight weeks of injections last year averaged 64 BCF and the five year average is 54 BCF. Current weather forecasts continue to call for mild weather which means an average of 80-90 BCF per week is very realistic. Even 80 BCF per week will cut the year over year deficit by 16 BCF per week and it would beat the five year average by 26 BCF per week. This math is currently priced into the natural gas futures market and explains why pricing seems to have found a new home in the $3.75-$3.80 range for the prompt month. The graph above shows the 12 month strip average throughout 2014. We are currently below $4.00 and have erased all premiums that came on in January, February, and March.
Further evidence that the natural gas market is back to “normal” can be found by revisiting the graph above which compares the running 12 month average (in red) against the running 60 month average (in purple). The recent sell-off has pushed the 12 month average back below the 60 month average to a more “normal” price environment. Essentially, the bone chilling winter has been offset and negated on the futures market by the overly mild summer.
The other major factor to watch in natural gas is basis movement. As a reminder, basis represents the price differential between a given market and the Henry Hub in Louisiana. With the emergence of shale gas, prices in Henry Hub are often times more expensive than other markets which creates a negative basis. One interesting idea worth focusing on is the inverse relationship between the NYMEX and basis prices. The example above focuses on the DTI basis market which serves one of the epicenters of shale gas, northeast Ohio. The analysis compares NYMEX and basis pricing over a 10 day timeframe. While NYMEX dropped $0.31 for the summer and $0.27 for the winter, basis moved the other direction (especially in the summer).
What we see happening is that traders are not just trading NYMEX and basis independently, rather they are considering the value of gas at a certain market (the third column in the chart). When NYMEX drops, basis has to increase in some form so as to keep the value of gas at DTI somewhat constant. This inverse relationship between NYMEX and basis will exist so long as the price of gas in a market does not change. End users should consider this relationship as they make NYMEX and basis decisions.