Henry Hub Natural gas Spot price
Million Btu stand for million British Thermal Units.
We can observe above the Henry Hub Natural Gas Spot Price from 16 Jan to 11 Feb. A small reminder for ones coming back from holidays, Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub.
On 4 Feb, the price went down to 2.54 (2540) USD per Million Btu which is quite impressing as the price didn’t fall at that stage since almost 1 year ago on 16Feb 2018. Since 3 years, the lowest price of LNG ca be found in the month of February. Therefore we can explain this fall to a seasonality trend.
What represent British Thermal Units.
First of all, below some acronyms to understand better their meaning. (US Energy Information Administration)
Btu—British thermal unit(s)
Ccf—the volume of 100 cubic feet (cf)
M—one thousand (1,000)
MM—one million (1,000,000)
Mcf—the volume of 1,000 cubic feet
MMBtu—1,000,000 British thermal units
Therm—One therm equals 100,000 Btu, or 0.10 MMBtu
Used as a unit of measurement for natural gas prices, Btu is the Amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit in practical terms, the amount of heat generated by one lighted stick of match. So we understand that it’s a representation of energy.
The heat content of natural gas may vary by location and by type of natural gas consumer, and it may vary over time. We can see the similarity with oil where the quality will change in function of the location. Therefore it’s important for Consumers/buyers to inform themselves about the natural gas distribution companies or natural gas suppliers for information on the heat content of the natural gas they are supplying. Some natural gas distribution companies or utilities may provide this information on customers’ bills.
Forward curve
According to the natural gas’ historical prices from the website “Market Insider”, we could see that the spot price dated 15thFebruary 2019 amounts to USD 2.63per mmbtu (one million British Thermal Units available at https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd).
As seen in the prior bulletins, the worldwide demand for natural gas and liquefied natural gas raises during the winter season. Being close to the end of the winter period, we could assume that the worldwide demand for natural gas and liquefied natural gas will decrease, mainly for the production of heat. A progressive decrease of the demand could be demonstrated by looking at the historical closing prices from 25thJanuary 2019 that amounted to USD 3.18per mmbtu to the closing price of USD 2.63per mmbtu dated on 15thFebruary 2019.
https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd).
By referring to the below natural gas’ forward curve which shows the 25 natural gas back-month contracts, we could determine that the natural gas market is currently in contango since the forward curve is upward sloping. Having the natural gas’ forward price higher than the spot price, this means that currently the natural gas and liquefied natural gas’ market is a bearish market.
Some significant definitions to know in futures trading are “the front month contract” and the “back-month contract”.
A front month contract is a future month contract with an expiration date closest to the current date. Most of the time, this is in the same month as the current date and is the most actively traded month (Chen, Front Month, 2018). The front month is also called the spot month.
The back-month contract is a type of future contract that expires in any month past the front month futures contract(Chen, Back Month Contract, 2009). You will find below the forward contract expiration dates of natural gas. These expiration dates are necessary to notice the convergence point of each forward contract. The convergence point is when a future/forward contract becomes a physical contract.
As seen in the bulletin no. 3 “LNG and NG, the best performing commodities in November 2018”, the factor that appreciates the future price is the change of season that will pass from the winter to the spring. As a conclusion, we recommend natural gas and liquefied natural gas’ producers to store their commodity and to sell with future/forward contracts.
LNG news
The Commonwealth project is one of more than 10 LNG export terminals under development and construction in the United States along the coast of the Gulf of Mexico (in Louisiana, where the Henry Hub is) to take advantage of demand for the gas production in the US, thanks to the shale gas.
Commonwealth LNG has received commitments from European buyers to take almost half of the liquefied natural gas (LNG) from the planned 8.4-million-tonnes-per-year export terminal in Louisiana. First shipments are planned for the beginning of 2024.
The project was also aiming Japan, the largest LNG importer in the world for many years. Surprisingly, Japanese companies were not so keen on signing long term deals with the American project: reasons mentioned were that the country is reopening slowly tis nuclear power plants, 8 years after the tsunami in 2011 and are focusing on renewable energies such as the offshore Wind Turbines, expected to bring more and more electricity in the future years. Will it be enough and how is the Japanese population going to react towards the reopening of these nuclear plants? Some reports are saying that Japanese are investing in Russian LNG projects near the Asian sea coasts.
Some suppositions:
We have seen that China and Russia are working together to put in place pipelines going through China. This is creating a second major gas buyer for Russia who has been ‘’stuck’’ with Europe as its only main buyer until now. Russia will be able to have better price bargaining power. On the other hand, US has begun to be a shale exporter thanks to its shale gas production. Europe is starting to buy from them expecting Russia to bargain more about its gas?
Could the Japanese also be thinking about negotiating with Russia now that they are expending their pipelines towards the sea?
References
Chen, J. (2009, February 15th). Back Month Contract. Retrieved February 19th, 2009, from Investopedia: https://www.investopedia.com/terms/b/backmonthcontract.asp
Chen, J. (2018, March 8th). Front Month. Retrieved February 19th, 2019, from Investopedia: https://www.investopedia.com/terms/f/front-month-contract.asp
https://ycharts.com/indicators/natural_gas_spot_price
https://www.eia.gov/tools/faqs/faq.php?id=45&t=8
http://www.businessdictionary.com/definition/British-thermal-unit-Btu.html