Verona, WI 10/23/2009 6:33:50 PM
News / Business

Natural Gas Price Gap Between Physical Prices and the NYMEX Disappears

The price gap between physical natural gas prices and the front-month natural gas NYMEX price was once greater than $2 per MMBtu. That price gap has entirely disappeared as physical prices and NYMEX natural gas prices have converged.

The large price gap between the physical price of natural gas in Louisiana and the November 2009 natural gas NYMEX futures contract has disappeared. Yesterday, the physical price of natural gas in Louisiana rose to $5.01 per MMBtu, while the November 2009 natural gas NYMEX price fell to $4.95 per MMBtu. This price gap is now just pennies, whereas at the start of October, it was over $2 per MMBtu.  As the expiration of a front-month NYMEX contract nears, these two prices are expected to converge. What was unknown, however, was whether the convergence would take place by physical prices rising or NYMEX prices falling.  In the end, physical natural gas prices or spot market prices rallied to close the price gap.

The November 2009 natural gas NYMEX contract will expire on Wednesday, October 28, 2009.  “Cooler temperatures are providing additional demand for natural gas in the Midwest and the Northeast and that is going to help to avoid ongoing constraints caused by storage already being so full.  However, it is also going to provide support for natural gas prices,” says Valerie Wood, President of Energy Solutions, Inc.  “Cooler temperatures are expected to continue into November and as a result, price strength is likely to continue as well.”

Relative to storage inventories, yesterday’s Energy Information Administration (EIA) injection report showed an injection of just 18 Bcf for the week ending October 16, 2009.  There are now just two weeks remaining in the injection season.  Inventories have reached 3,734 Bcf, which is 189 Bcf higher than ever before and 397 Bcf higher than last year's inventories.  “There is nothing bullish about storage, but for now fears of colder winter weather are "trumping" all other data,” says Wood.
 

Right now, the market is somewhat directionless.  According to Wood, this is the seasonal fourth quarter rally and periodic pullbacks are just that -- temporary.  “It is important for buyers to remember that under seasonal fourth quarter rallies, the high is typically hit by the end of October or mid-November, but sometimes the rally can carry into December,” says Wood.  “Buyers need to be patient right now, but they shouldn’t go to sleep.  We expect a major buying opportunity to surface with the first quarter decline, which sometimes occurs as early as mid-December.” 

Learn more about to prepare for this anticipated buying opportunity in the October edition of The Advisor, a publication of Energy Solutions, Inc. Request your complimentary copy by sending your request to request-oct-pr23@energysolutionsinc.com or call (608) 848-9589. 

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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.