NYMEX Purchase (Yea…Now May Be The Time)

by Matthew Mattingly

The NYMEX natural gas market has been depressed for a while now, even more so than the plot of Manchester by the Sea. Thanks to the shale era at the start of this decade, the NYMEX natural gas market has traded at historical lows. Furthermore, it’s been a rare occurrence for an upward price movement to occur (Polar Vortex you can stand up again). This long trend of low pricing has provided many end-users with a false sense of security in regards to their natural gas contracts; as many believe the NYMEX portion of their contract will not increase. However, the natural gas market is starting to see some changes in the supply/demand equilibrium that could move the price needle higher in the NYMEX market. See below for several bullish fundamentals that are hitting the market in the coming years…

• LNG exports started in 2016 with the opening of Sabine Pass terminal. The current takeaway capacity from Sabine Pass is 1 Bcf/Day, but will be to over 2 Bcf/Day when Sabine Pass Train’s 3 & 4 come online in 2017. However, the biggest move in LNG will be in 2019 when several other LNG export terminals come online, including: Cove Point, Cameron, Freeport, and Corpus Christi.
• U.S. natural gas exports to Mexico have grown significantly in recent years, reaching above 4 Bcf/Day for a couple months in 2016. The growth is not expected to stop as additional pipeline projects are expected to be completed in the coming years, including the Nueva Era Pipeline (1.12 Bcf/Day) , Comanche Trail (1.1 Bcf/Day), and Trans-pecos Pipeline (1.35 Bcf/Day). In 2017 alone, U.S. exports to Mexico are expected to grow by nearly 1 Bcf/Day.
• Industrial gas demand is expected to grow in 2017 and 2018 based on latest EIA to 21.57 Bcf/Day, representing a 0.5 Bcf/Day increase from 2016. The increase is led by the chemical sector which uses natural gas as a feedstock in the petrochemical industry, such as ethylene, propylene, and butadiene.
• EIA is reporting that natural gas-fired generation will increase by an additional 11.2 gigawatts (GW) in 2017 and 25.4 GW in 2018.
• Although summer forecasts are not currently available, it is worth noting that following very mild winters in both 2012 and 2016 the United States experienced extremely hot summers. These record setting summers caused increased natural gas generation to meet cooling demand, and help rebalance the supply/demand for natural gas.

As a result of the increased natural gas demand, Choice Energy Services believes that prices will have to rise to give incentive to producers to bring more natural gas online. However, Choice is not the only group that thinks natural gas pricing could potentially move higher. The EIA is forecasting natural gas pricing well above $3.00/MMBtu for the remainder of 2017 and throughout 2018 in the February Short Term Energy Outlook (STEO Report). The current NYMEX forward curve is trading well below the EIA’s projections, so purchasing at current levels could potentially provide a true win-win that would even make Charlie Sheen proud…

Win 1 = provide budget certainty by securing the NYMEX portion of one’s natural gas contract
Win 2 = secure a forward price potentially below settlement expectations

Source: EIA Short Outlook & EOX Forward Data
Graph: Choice Energy Services