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.

On behalf of the team at 5, I am pleased to forward our market letter for the third quarter of 2021. World leaders convened in Glasgow on October 31st to address international commitments to lower greenhouse gas emissions. The energy market welcomed these delegates with a complex set of conditions that frame the challenge posed by the transition to a clean energy economy. These include historically high natural gas prices and significant energy shortages in several markets that moved aggressively to decarbonize their electricity grids: UK, Germany, and California. At the same time, energy shortages in China may undercut decarbonization efforts of the world’s largest carbon emitter.

Liquified Natural Gas (LNG) is produced through a process that super-cools pure methane gas to approximately -260ºF, which enables it to be stored in liquid form at normal atmospheric pressures and conveniently shipped overseas. Now that’s super cool in our book.

Have you ever believed the energy market myth that natural gas prices are always cheaper during the fall and spring?

There’s nothing like ending the month with a bang, which seems to be the trend for the settlement of the NYMEX Henry Hub prompt month natural gas contracts over the last three months. For most of August, the prompt trading month (September) was slowly churning lower, see Figure 1. By the middle of the month, prices even fell below the $3.90 to $4.10 per MMBtu trading range that was established in late July.

Global natural gas markets are finally starting the rally that many producers had been anticipating in recent years. Last year, global demand for LNG dropped so precipitously that some LNG buyers elected to pay LNG liquidation terminals their contractually obligated tolling agreement payments and canceled their delivery of the actual commodity. Subsequently, last summer spot prices for the Japan/Korea Marker (JKM, the Asian LNG version of the Henry Hub natural gas trading hub in the US) traded below $3 per MMBtu. On July 28 of this year, the future contract for September LNG delivery was trading around $14.50 per MMBtu. Figure 1 shows that the JKM price for LNG has increased three-fold over the last year.

On behalf of the team at 5, I am pleased to forward our market letter for the second quarter of 2021. The unusual weather that caused historic outages and extreme electricity and natural gas prices in Texas in Q1 surfaced in other markets in Q2. Both the Pacific Northwest and the Western US faced extreme weather conditions, namely, heat. In Death Valley, temperatures hit 130 degrees on July 9, a world record for the hottest reliably measured temperature in recorded history.

NYMEX Henry Hub Natural Gas prices continue the strong rally that began in March with a persistent increase in prices extending all the way back to the onset of the pandemic at the beginning of 2020. Natural gas prices for the prompt month, balance of 2021, and future calendar years are all moving in the same direction. These sharp price increases can be seen in the NYMEX forward curves in Figure 1. And while all gas prices in all calendar years are on the rise, the strongest rally is in near-term prices over the next 18-months (see black, blue, and green lines in Figure 1).

Given the massive drop in oil and natural gas prices last year, it is no surprise that producers reacted by dramatically reducing rig counts and the amount of gas supplied to the market. This decrease in supply was not only rational but also welcomed as it stabilized prices and storage levels. This past week, the Energy Information Agency (EIA) released their graph of historical natural gas rig counts. This chart, in Figure 1 below, shows the sharp decrease in active natural gas drilling rigs in the nation’s three largest gas-producing regions. The modest increase in total rig counts over the past six months shows that producers are unwillingness to spend significant capital to increase production, given today’s market prices.