Imagine the reaction of a modest homeowner in America who received an invoice from their electric utility that was more than $1,000 per month, or a monthly natural gas bill that exceeded $500. While these figures may seem outrageous, this is the situation that many in Europe are facing as they head into the fall and winter heating season. Anyone who has shopped for natural gas or electricity knows that prices have consistently increased over the last 18 months. Many homes and businesses are seeing electricity and natural gas rates that are between three and five times higher than previous contracted rates. And while there is no question that this is painful, the situation in the United States is not nearly as desperate as it is in Europe. The chart in Figure 1 shows that the price of natural gas for January delivery at the Dutch TTF trading hub peaked in late August at over $100/MMBtu. Domestically, on August 23, that same contract hit its maximum value of $9.77/MMBtu, making the European price of natural gas ten times more expensive than in the United States for that October contract. Circumstances are similar in Europe’s electricity markets. In late August, wholesale electricity prices in France were more than five times the wholesale price of electricity in New York City. As Figure 1 shows, the price of that January contract has fallen in Europe (and domestically) over the last month, but it also illustrates the dramatic difference in energy prices on both sides of the Atlantic Ocean.

Earlier this year, we wrote an article describing the rapid acceleration of price volatility in the natural gas markets, with a chart that showed daily price movement at the Henry Hub, the national benchmark trading hub for natural gas. In this chart, shown in Figure 1, the y-axis is the daily price change in natural gas prices over the last ten years. A negative number means the price went down and a positive number means the prices increased during that day’s trading session. This chart shows that since the summer of 2021, there is a higher degree of scatter among the data points, indicating that gas prices have become increasingly volatile over the past 12 months. One interesting feature that this data shows is this volatility has not been predominantly in one direction, or skewed to either the upside or downside, rather, it has been evenly distributed around the mean.

What is Driving the Extreme Volatility in the Natural Gas Market?

The NYMEX Henry Hub prompt month future contract continued to push the volatility envelope this past month, with the daily change for August delivery exceeding $0.37/MMBtu. This is significant because the average daily change over the previous twelve July’s average was approximately $0.05, with a maximum average daily change of $0.08 back in 2012 (See Figure 1). Last month, we wrote about the explosion at the Freeport LNG plant south of Houston, Texas, and how it affected both international and domestic prices for natural gas.

On behalf of the team at 5, I am pleased to forward our market letter for the second quarter of 2022. The dramatic increase in the price of electricity and natural gas noted in our Q1 letter continued its upward climb in Q2, fueled primarily by the war in Ukraine and its impact on the price of LNG. This dramatic increase is shown in Figure 1.

On Wednesday, June 8, 2022, from 10:00 AM to about 12:00 PM CDT, the July contract for NYMEX Henry Hub was trading around $9.60 per MMBtu. Even so, $9.60 is not an all-time high price for NYMEX Henry Hub. During the fall of 2005, after Hurricanes Katrina and Rita significantly reduced oil and gas production in the Gulf of Mexico, the Henry Hub contract settled above $9.60 from September through January before settling back down below $9.00 in February 2006. Additionally, during the spring and summer of 2008, April through August settled above $9.00. Since September 2008, no month has settled above $9.00. So, on the morning of June 8, after rallying up 30¢ from the previous night’s closing price of $9.30, it looked like natural gas would again test the $10 mark for the first time in nearly 15 years. Then there was an explosion at a plant due South of Houston, near a small town called Freeport, Texas.

Natural Gas Update for May 2022

This past month, the US natural gas market continued the recent trend that was established in mid-February. Strong bullish tendencies set new highs and blew past previous resistance levels (ceilings or limits to the upside) while also setting new support levels for any possible retracement in the future. Figure 1 shows how the June contract settled with daily candlestick bars. And while the curve seems to have given up its exponential shape from early April, it now appears to maintain a linear upward trend. The previous two market retracements during this sustained rally both took place directly after touching the psychological resistance levels of $8.00 in mid-April, and again at $9.00 in early May, otherwise, the market has been on a consistent upward trend.

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.