Natural Gas Price Gap Too Large

Physical natural gas prices are $1.50 per MMBtu lower than the front-month natural gas NYMEX futures contract.  At some point, perception will collide with reality and these two prices will converge.

Verona, WI — September 30, 2009 – Yesterday, the physical price of natural gas at the Henry Hub in Louisiana was around $3.30 per MMBtu.  This price level reflects the current supply and demand situation.  Natural gas storage inventories are expected to establish a new all-time record tomorrow.  Meanwhile, industrial demand remains down and hurricane season has been very uneventful so storm-induced curtailments have been nonexistent.  Overall, supply continues to outpace demand and as a result, physical cash prices remain under $4 per MMBtu.

Conversely, the November 2009 natural gas contract on the New York Mercantile Exchange (NYMEX), which physically trades at the Henry Hub in Louisiana, is valued at around $4.80 per MMBtu.  “The price spread between physical prices and the front-month NYMEX price for November is too large,” says Valerie Wood, President of Energy Solutions, Inc.  “Physical prices reflect that current natural gas supplies are sufficient.  However, natural gas NYMEX prices seem to be reflecting a quick demand recovery as NYMEX prices for early 2010 are close to $6 per MMBtu.  In the end, we expect a head-on collision between perception and reality to occur before winter is over.”

With natural gas prices into the future retaining a large premium to current prices, there will be an economic incentive for storage owners to retain storage for use in late-winter.  “This means that storage supplies, which are relied upon for very cold days, will likely be very ample yet by mid-winter.  It is at this point, where we expect this perception of a quick demand recovery to be overshadowed by the reality of sufficient supplies.  This collision of perception with reality should cause the price support for next year and beyond to weaken,” says Wood.

The timing of this collision and impending natural gas price decline will be discussed in greater length in Energy Solutions’ October edition of The Advisor, to be issued next week.  Request a complimentary copy of The Advisor by sending your request to request@energysolutionsinc.com or call (608) 848-9589.
 

 
About Energy Solutions, Inc.

Formed in 1996, Energy Solutions, Inc. is independently owned. With more than 25 years of experience in the natural gas industry, our team focuses on natural gas prices and in helping businesses improve their internal processes for the purchase of natural gas.