Over the last few months, these updates have focused on the steady run-up in natural gas prices, and the correlation between US natural gas prices and gas prices in other parts of the world, specifically the price of LNG in Asia and Europe. Each month it may seem like a broken record (pun intended, get it?) as we report that wholesale natural gas prices have hit new, record highs. This month, domestic natural gas soared to 10+ year highs, which pushed short-term forward prices to levels we have not seen since early 2008. The last time prices were this high, this country was in the midst of “the Great Recession” and “hydraulic fracturing” was just emerging as a technology that sent a very volatile gas market into a decade of slowly declining prices.

On behalf of the team at 5, I am pleased to forward our market letter for the first quarter of 2022. In this issue, we continue our focus on the energy transition and the strain that this has put on the energy market. Our last letter quoted Larry Fink of Blackrock on the importance of navigating the “global energy transition.” The past quarter’s events add geopolitical risks to the navigational challenges associated with this transition.

What is causing global forces to outweigh the domestic signals for natural gas prices?

If you still buy into the old trader’s tale of “buy natural gas in the fall and spring when it is cheaper” it’s likely that your energy purchasing strategies are as unlucky as your March Madness bracket. Last fall we saw one of the largest natural gas rallies in recent history as European and Asian storage levels were depleted and international LNG prices reached record highs. Now, at the beginning of spring, when natural gas withdrawals from storage are starting to dwindle and the country normally shifts to producing more natural gas than it consumes, we are again looking at another significant market rally, with April’s NYMEX contract settling at the highest price for any April delivery since 2008.

How is the Situation in Ukraine Impacting Global and Domestic Natural Gas Markets?

On February 21, 2022, Russia declared that the Eastern Ukrainian regions of Donetsk and Luhansk were independent territories while simultaneously stating those territories were in need of Russian security forces. While this declaration and escalation did not surprise many, it prompted a number of questions and concerns around the short-term and longer-term risks to international and domestic energy markets. Russia’s full-scale invasion of Ukraine on February 23, 2022, caused international energy prices to become more volatile during overnight and intraday trading. However, West Texas Intermediate (WTI) crude prices for April delivery closed on Thursday up only around 70¢ per barrel compared to Wednesday’s closing price. Friday’s trading session also saw a slight sell-off, with prices closing around $91.50 per barrel. European natural gas futures had a stronger reaction. The large European Liquified Natural Gas (LNG) trading hub, the Dutch Title Transfer Facility (TTF) rallied up to €132/MWh (about $43USD/MMBtu) before settling down closer to $30USD/MMBtu on Friday.

What are the Drivers of Natural Gas Production and Pricing?

The dramatic changes in demand for many commodities over the past 24 months have wreaked havoc on supply chains across the world - energy markets are no exception. When demand for oil and gasoline tanked in the spring of 2020, oil prices fell to record lows, with near-term delivery prices even going negative. Natural gas prices did not fare much better, with spot prices during the summer and fall of 2020 setting new 25-year record lows. Producers of both oil and natural gas quickly reacted to those price signals, and production of both commodities began to drop as capital expenditures quickly ceased.

“Few things will impact capital allocation decisions – and thereby the long-term value of your company – more than how effectively you navigate the global energy transition in the years ahead.”  - Larry Fink, Blackstone CEO Letter 2022

On behalf of the team at 5, I am pleased to forward our market letter for the fourth quarter of 2021. This letter continues our focus on the conflict between regulations that promote low carbon energy production, and the strain that this energy transition puts on utility systems that must: (i) accommodate intermittent energy sources, and (ii) ensure reliable electric supply at a reasonable cost. California and Europe have taken aggressive regulatory action to reduce carbon emissions. Perhaps because of their early mover status, these markets are also good examples of the challenge faced by regulators overseeing the energy transition.

At the end of last month, the news was buzzing about the newly discovered Omicron variant. On the last day of trading for the December NYMEX contract, the December price jumped up almost 50¢ to close at $5.447, settling well below the previous month’s closing of $6.202, which was the highest closing NYMEX price since December 2008.

Natural gas, also commonly referred to by its chemical name, methane, is one of the single most controversial topics of the energy transition so far. On the one hand, natural gas is an energy commodity that is far cleaner than coal as a feedstock for power generation and it is a fuel for which there is no alternative in terms of its load-following characteristics. It can be dispatched on very short notice, ramp up and down quickly and easily, and can stay on-line for days on end, as long as the gas delivery network is functional (which, as we learned in Texas in February 2021, is not always the case).

On Friday, the last day of trading for the December NYMEX Henry Hub contract, trading was light, but the news was heavy. The newest COVID-19 variant B.1.1.529, named by the World Health Organization (WHO) as the Omicron variant, was first reported to WHO from South Africa on November 24. By the time energy markets opened Friday morning after the Thanksgiving holiday, the Omicron fear had moved into the markets.

The team at 5 has spent many months, complemented by countless charts, graphs, and blog posts, discussing the rising prices and volatility in the energy markets. When you spend so much time in the weeds, the bigger picture becomes cloudy. In this reflection, we step back to highlight the fundamental shift that has happened in the marketplace over the last year. Shifts of this magnitude do not happen often, perhaps once every ten years, and they need to be called out.