In my Forbes column Monday I predicted a continuation of the recent rally in natural gas pricing, and Friday’s jump is natgas futures prices has confirmed that prediction. As of this writing, the Henry Hub natural gas futures contract for December is quoted at $3.77/mmBTU, a 6.2% jump from Thursday’s close. Note that I didn’t describe that jump as “stunning” or “astounding” or one of my other favorite adjectives.
Energy traders call the natgas futures contract “the widowmaker” due to its penchant for volatility. As I mentioned in my column Monday, however, we are not seeing volatility in natural gas prices in the fourth quarter. Rather, we are seeing a strong, sustained move upward.
Barring a tremendous reversal, Friday’s trading will mark the high-water mark for natural gas prices for 2018, eclipsing the previous high of $3.64 set on January 29th. In fact the current contract price would imply the highest close since December 28th, 2016, and that puts this recent move in historical context.
Market technicians–and I am certainly not one–would describe this recent move in natgas futures prices as a “breakout,” and it has been a full four years since natgas futures have closed a week ($4.09 on November 1, 2014) trading above $4/mmBTU.
That breakout concept is especially relevant owing to the current timing in the annual natural gas cycle. According to Energy Information Administration data, this week–the 45th of the year–is the average point at which natural gas builds stop and the drawdown season–driven by winter heating needs–begins. Thursday’s EIA report showed a nationwide natgas inventory level that is 560 billion cubic feet, or 15.3%, below its level of a year-ago, and it is simply too late in the year to make up that stagger.
E&Ps have already cemented their drilling budgets for the rest of the year, and, as someone who grew up in Central Pennsylvania, I can confirm that the ground will begin to freeze soon. That makes drilling in the key Marcellus/Utica shale gas region of Pennsylvania, West Virginia and Ohio difficult until the spring thaw occurs.
As with crude oil pricing, though, the energy futures markets’ myopic focus on supply misses the bigger picture: natgas prices are rising because demand is skyrocketing. In the third quarter the U.S. consumed 73.26 bcf per day of natural gas, more than 10% above the 66.88 bcf per day consumed in the year-ago period. The U.S. economy is just plain rockin’, as this country is well on its way in 2018 to producing an above- 3% GDP growth figure for the first year since 2005.
Electric power plants are the largest consumer of natural gas in the U.S., at about 45% of the total consumption, and that cohort posted 17% annual growth in natgas use in the third quarter.
Imports could be viewed as a quick fix to low natgas inventories, but owing to the molecular hyperactivity of pure CH4 (methane,) natgas is just not that easy to move from place to place. The U.S. exports more natgas than it imports, and even on a net basis imports only account for about 11% of total U.S. natgas supply.
So, the natgas balance sheet is out of balance, and commodity markets have a way of adjusting to supply shortages quickly. I noted that I was buying four natgas stocks this week–Range Resources, Antero Resources, EQT Resources and EOG Resources–in my Forbes column Monday, and Range and EQT have risen sharply in the past three days. I am absolutely not selling any of them. If I have learned one thing in following the energy markets for the past 15 years, it is that supply imbalances tend to take longer than the market initially estimates to rebalance.
That these stocks are benefiting from inflation at the same time that overall market is falling based on concerns over the Federal Reserve’s efforts to fight inflation (via increased Fed Funds rate targets) is a perfect hedge for your portfolio going into year-end.
Range Resources: NYSE:RRC
Antero Resources: NYSE:AR
EOG Resources: NYSE:EOG
EQT Resources: NYSE:EQT