by Matthew Mattingly
Typically at least once a day I will see something on the internet or TV that makes me feel old. Today didn’t disappoint when I saw the following tweet regarding hats….
For the last couple of years I’ve noticed the trend was going to the flat bill hat, but curved hats are now called “dad hats?!” What happened? What’s wrong with society? It didn’t seem that long ago when I was growing up that I used to make fun of other kids for not having the proper curve in their hat. Curving the bill of your hat was an art. Make it too steep, and it looked like a mountain. Curve the edges too much, and your hat would look like an odd geometry shape. The art was to ensure the curve was symmetrical and well rounded. But I guess that art of curving your bill will be lost on the next generation just like CDs and flip phones.
Just like hats, the NYMEX natural gas market is trending more flat as well. The steep contango that once existed in the natural gas forward curve has shrunk dramatically to where premium is almost nonexistent in the forward curve. In fact, the February 16, 2016 NYMEX forward curve doesn’t print a $3.00/MMBtu price until January 2020! It wasn’t long ago when breaking below $3.00/MMBtu for prompt gas was an important technical threshold and considered a psychological hurdle for the natural gas market. Not any longer, every month for the next four years is trading less than $3.00/MMBtu.
Breaking through the $3.00/MMBtu floor price has occurred a few times since the beginning of the shale revolution. When this did occur, producers found relief with the steep contango prices in the forward curve. For example, in September 2009 prompt month natural gas traded as low as $2.508/MMBtu but that was much lower than average for the next 12 months of trades ($4.674) and significantly lower than the trades for the following winter strip ($6.416). It took a few years for pricing to break the $3.00 floor again (spring of 2012), but when it did, producers could still count on pricing near $4.00/MMBtu in the following winter strip. Nevertheless, since that time the contango has continued to flatten to where it is today, with pricing less than $3.00/MMBtu across the board.
In time, most fashion trends are cyclical. So hopefully the curve brim hats will be back in style. Likewise, producers are hopeful for a return of higher pricing in the natural gas market. Producers are struggling at current price levels, and many will not have the capital to survive much longer. When will natural gas pricing return back to $3.00 or higher? That is tough to pin-point, but there are bullish signals to watch. But as of now, just like the flat bill hat, sub $3.00 pricing looks to be here to stay for some time.