What if the price of natural gas had already reached its maximum of this cycle?
Anyone who had ever heard the minister of the branch (Teresa Ribera) on October 5 (or to the experts in the sector on TV around the same time) that gas prices would continue to rise until January 2022, the normal thing is that I would have thought that, if the price of natural gas that day was at 6 $.5 (per million British thermal units) for the month of January would be much higher.
With much more reason when the minister had assured, very seriously, that the forecast she had made is what some omniscient futures markets assured would happen.
Nevertheless, At the end of last week, the price of natural gas had not only not risenbut it was lower: at $5.28 (20% less).
Have the futures markets been wrong or was the minister confused in telling it? Neither things. What happens is that the futures markets on the price of natural gas (like those of other raw materials) do not tell us, as the minister seems to have been told, the future price of gas, but the price that must be pay today to have it delivered to us in the future. That is, the word “future” refers not so much to the price as to the delivery time of the merchandise.
They don’t buy the gas today to take it home today. They buy it today to have it delivered (for example) in the next month of January
And the thing is that there are such strange people… They don’t buy gas today to take it home today. They buy it today to have it delivered (for example) in the next month of January, and it is that price of a delivery deferred until January that turns out to be the most expensive at this time. More expensive than delivery in November and December.
This is applicable both for the prices that could be contracted on October 5 and for those of today. In both cases the price for delivery in January is higher than that for immediate delivery.
And why is that January delivery price higher? Because whoever sells you the gas today, but is going to deliver it to you in January, has financing and storage costs until then that, naturally, the buyer will want to pay: the poor little guy who sells it to you does enough to keep it bought and stored until the date the buyer wants it to be delivered…
Who bought on October 5 to have natural gas delivered in the same month paid 6.5 dollars, but if he wanted it for the month of January he paid 6.8
To make it clearer: whoever bought on October 5 to have natural gas delivered in the same month paid 6.5 dollars (per million British thermal units), but if he wanted it for the month of January, he paid 6.8.
On the other hand, whoever bought natural gas last Friday afternoon to have it delivered this week paid $5.28, while those who wanted it for January paid 28 cents more; i.e. 5.56.
You can see that those who made it last Friday have made a much better purchase, whether they wanted the immediate delivery of the gas or if they wanted it to be sent home in January (naturally these are wholesale markets and not they would send it home to no one but to the storage depots of some large industrial company).
This highlights that nobody knows what the price of gas for immediate delivery will be when the harsh winter arrives. What is known for certain (with the current structure of the futures market, which is called, by the way, contango) is that buying today for deferred delivery is more expensive than buying for immediate delivery.
And that is what seemed to be the inaccuracy or the inadequate way of telling the minister. Someone should explain to him that the highest price is not necessarily going to be paid in January (although it could be) but that what everyone wants is to have a guaranteed supply for that month.
Have we already seen the highest price of gas in this cycle of rising prices? It could be yes, although the probability is quite low
And hence the purchases for delivery within that period, which can lead the gas market agents to suspect something (another Philomena Storm?) about gas supply mismatches by then, which makes them pay a premium to have it insured at a known price. But by passing, passing, anything can happen. Even a relatively mild January would drive prices down by then.
Therefore, all that can be done is to speculate intellectually (in addition to being able to do so in the markets) about which month gas will be most expensive, and what the price level will be when that month arrives.
Normally, those cabals about prices are done in a well-reasoned manner, and with the best technical language, by those who work every day in the business of buying and selling natural gas, and not by those who watch the bulls from the sidelines, but that is no guarantee that they will do it with more success than these. And all due to the degree of randomness so high that it has everything related to the future prices of any commodity.
Well, we’re going to do a few of those guesses to try to guess the answer to the headline of the column: have we already seen the highest price of gas in this cycle of price increases? It could be that yes, although the probability is quite low: 15%.
There is something very striking and that is that oil prices are not rising this year at the same rate as natural gas
Or, at least, that is what the history of the last 27 years says. In them, November (in eight different years) and December (in another eight) were the months in which natural gas most frequently reached its maximum price of the year. In October that happened four times.
In the remaining seven years, the highest price peak has occurred irregularly, in January (three times), February (once), May (twice) and even July (once). Hence, probabilistically (frequently) speaking, the months of November and December seem the most plausible for the maximum price to occur: between the two they accumulate a frequency of almost 60%.
But there is something very striking and that is that oil prices are not rising this year at the same rate as natural gas, which means that the price of gas is well above where it was before the pandemic (150% more expensive). today, and at the beginning of October 188% more) while that of Brent oil is only 28% above the pre-pandemic level.
And that is a very extreme situation since the price of oil and the price of natural gas tend to court each other, in such a way that neither in annual nor biennial periods is there almost never (or never) such a large divergence.
This makes a significant correction in the price of natural gas very likely, although it cannot be ruled out that the convergence between the two could be caused by a sharp rise in the price of oil, but that it would occur with a stagnation in the price of gas so that it would be possible.
At this point it already seems that it is taken for granted that this coming winter we will be in the worst of all worlds in terms of gas and electricity supply
Which, in turn, except for serious problems in the Middle East or other producers, seems unlikely in an environment of slowdown in the world economy.
It gives the feeling that the panic of shortages is playing tricks, not because gas reserves are not very low, which they are, but because at this point it seems that it is taken for granted that this coming winter we will be in the worst of all worlds when it comes to gas and electricity supply.
And usually when that’s the case, there is usually a sudden change in trend. It would suffice for an agreement to be reached on the opening of the Nord Stream 2 gas pipeline; that Algeria resume or soften its relations with Morocco or that the world economy slow down faster than it is doing for this change in trend to materialize.
If he hasn’t already done so since October 5. What is a bizarre bet where they exist, but what, despite its low probability of 15% it can make sense. After all, the probability that Biden would win the presidency over Trump, despite the fact that all US presidents tend to repeat terms, was just as low…