NYMEX natural gas futures began trading in 1990. In 1992, the price reached a record low of $1.04 per MMBtu. Over the following fifteen years, the energy commodity made higher lows and higher highs, reaching a record peak in 2005.
The futures market’s delivery point is the Henry Hub in Erath, Louisiana. In 2005 and 2008, a pair of storms, Hurricanes Katrina and Rita, caused massive damage along the US Gulf Coast, wreaking havoc with natural gas pipelines. NYMEX futures rose to a record $15.78 per MMBtu in 2005 and hit a lower peak of $13.694 in 2008. Meanwhile, the 2005 high led to a decade-and-a-half bearish trend. Meanwhile, the supply and demand fundamentals underwent significant changes, setting the stage for a bullish breakout from the June 2020 low.
Massive discoveries in the US
This century, the US uncovered substantial natural gas reserves in the Marcellus and Utica shale regions, increasing US supplies. Moreover, technological advances in extracting the gas from the earth’s crust reduced the production cost, contributing to the pattern of lower highs and lower lows in NYMEX natural gas futures from the 2005 high to the June 2020 low.
The chart highlights the steady decline from $15.78 in 2005 to $1.44 per MMBtu from December 2005 through June 2020. The 2020 low was the lowest price in twenty-five years since 1995. The global pandemic contributed to the 2020 low, but natural gas had already been in a bearish trend that took the price over 90% lower.
Natural gas replaces coal in power generation
Coal, the fossil fuel that generated power in electricity plants, was the first target for the US in addressing climate change.
The US had been a leading world coal producer for years.
Source: Wikipedia
The chart highlights that US coal output dropped from over one billion tons in 2007 to below 500 million in 2020. Natural gas, a cleaner fossil fuel, replaced coal in US electricity generation over the past years, weighing on coal prices. However, the increasing US reserves did not lift natural gas prices even though the demand increased.
LNG- Necessity is the mother of invention
As necessity is the mother of invention, processing US natural gas into a liquid created a new demand vertical for the energy commodity as supplies rose. Natural gas began traveling far beyond the North American pipeline network to locations where the price is significantly higher than in the US. Natural gas shipments to Asia and Europe began to increase as ocean vessels carried the energy commodity abroad, increasing the addressable market for US gas.
LNG started becoming a significant factor in the US natural gas market in 2022 as war broke out in Europe.
Europe’s dependence on gas from the East
The world’s two leading natural gas-producing countries are the United States and Russia. While other nations produce the energy commodity, the US and Russia dominate the market.
Russia was the primary exporter of natural gas to Europe for many years. The geographical advantages of importing Russian natural gas made Western Europe dependent on Russia’s supplies. Meanwhile, in February 2022, Russian troops crossed the Ukraine border, starting the first major war since WW II. The US and NATO have supported Ukraine in its efforts to fend off Russian aggression, supplying arms and funding. Sanctions on Russia continue to weigh on the Russian economy, and retaliation has turned natural gas exports to "unfriendly” European countries into an economic weapon. As we move closer to the winter peak heating season, the potential for natural gas shortages has pushed European prices higher. In 2022, Dutch natural gas futures prices rose to a record high, and UK natural gas futures prices soared. After correcting from the 2022 highs, Dutch and UK prices remain above pre-2021 highs in mid-September 2022.
As US natural gas has become a more international energy commodity because of LNG shipments, US futures prices rose to a fourteen-year high in August.
The chart illustrates the rise in US NYMEX natural gas futures prices in August 2022 that eclipsed the $10 per MMBtu level for the first time since 2008. It was only the fifth time in thirty-two years that NYMEX natural gas futures traded above the $10 level. The price was above the level in 2000, 2003, 2005, and 2008.
The winter approaches with US supplies at a low level during a unique year
Over the past weeks, NYMEX natural gas corrected lower, but at over $8.60 per MMBtu, it remains at the highest price since 2008 with the high-demand winter months ahead. Historically, natural gas tends to reach annual highs at the beginning of the yearly withdrawal season when stockpiles decline from November through March.
The US is heading into the peak demand season with low stockpile levels.
Source: EIA
The chart shows that natural gas supplies in storage across the US stood at 7.6% below last year’s level and 11.5% under the five-year average for the week ending on September 2, 2022. While Europe struggles to secure natural gas supplies from other exporters to counter shortages from the Russians, the US will be little help given the low inventory levels during the coming winter.
The chart shows the pattern of higher lows and higher highs throughout 2022. Even though natural gas retreated from above the $10 per MMBtu level, at over $8.60 per MMBtu on September 14, natural gas remains in a bullish trend with the most explosive months on the horizon.
Trading natural gas is not for the faint of heart, and the price action in 2022 reminds us of the energy commodity’s explosive and implosive nature. So far this year, nearby NYMEX natural gas futures have traded in a $6.39 range. In 2021, the annual range was $4.052, in 2020, it was $1.956. The last time the range was wider was in 2008, when it was $8.484 and natural gas futures peaked at $13.694. With three of the most volatile months to go in 2022, we could see another significant rally in the natural gas futures arena as supply concerns grip Europe and spill over to the US. A cold winter in the US and Europe would only exacerbate the potential for wild price swings in the natural gas futures market during the 2022/2023 winter season. Expect lots of natural gas price volatility, and you will not be disappointed.
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