Oil and Gas futures contracts

[dan_s]

The oil and natural gas prices that you see quoted here or anywhere in the news are the current prices of the front month NYMEX futures contract for each commodity. WTI and Brent oil futures contacts are the most highly traded commodity futures contracts in the world. More "Paper Oil" is traded each day than all of the metals' futures combined.

> A lot of the open futures contracts are traded daily by "Paper Traders" that cannot take physical delivery.
> Futures contracts are settled in the "Physical World" at Cushing, Oklahoma for crude oil and Henry Hub, Louisiana for U.S. natural gas.
> Paper Traders that are long a contract on the exploration date must take physical delivery at Cushing or Henry Hub. They will be invoiced each month for storage fees.
> Paper Traders that are short contracts would need to deliver the oil or gas, which of course they do not have. The Shorts would have to buy oil on the open market to fulfill on the obligation. Shorts have been wiped out for forgetting to close their positions.

Since 99% of the Paper Traders do not want to take delivery because most of them cannot afford full payment, there are often wild price swings as the expiration date approaches. One WTI oil contract is 1,000 barrels of oil. So, the Paper Traders must close out their positions before expiration day.

Oil prices are set by global supply & demand. A small percentage over or under supply can have a big impact on the price of oil. Whenever there is news about something like the significant sanctions on Russian oil companies comes out near the end of the month, it can cause BIG price swings like we are seeing this week for oil. There is also unfinished business in Iran and the U.S. will soon be invading Venezuela, another oil exporter.

Natural Gas prices are determined by regional supply/demand fundamentals. As winter approaches there are often big price swings. Weather is ALWAYS the primary driver of natural gas prices in the 4th quarter. LNG exports are becoming a more significant percentage of demand for gas each year.

Here is the link to the NYMEX futures strip for HH natural gas:
https://www.cmegroup.com/markets/energy/natural-gas/natural-gas.quotes.html

Note that there is a $0.70 gap between the NOV25 contract and the DEC25 contract, which will be the front month on October 30. For investors that don't understand how this works (and most of them don't), they will be shocked by a 30% price spike next week. It should be a fun day to own the stock of gassers.

Demand for U.S. natural gas is growing at a much faster pace (about 5% per year) than the global demand for oil (about 1% per year). Demand growth for natural gas is because of the relentless demand growth for electricity. Natural gas has been called a "Transition Fuel". In reality it is "The Future". Wind and Solar cannot become a significant percentage of any modern economies total energy supply because they are too unreliable.

North America is blessed to have abundant natural gas reserves, virtually an unlimited supply. What's going to tighten up supply and demand is the lack of pipelines, storage capacity and processing infrastructure.

If we do have a colder than normal winter in North American, natural gas will be "rationed by price". This has happened four times over the last 25 years with the HH gas price going over $9.00/MMBtu each time and over $13.00/MMBtu two of those times. The most recent spike over $9.00 was in August 2022.

Today the natural gas prices are $11.16/MMbtu in Japan/Korea and $10.83/MMBtu on the Dutch TTF markets. Outside of North America natural gas trades at about 1/6th the oil price, which is based on its energy content.

[dan_s]

The "Refill Season" will end this year on November 14th. As of today, CelsiusEnergy is forecasting that there will be 3,938 Bcf in storage on November 14th, which will be 138 Bcf over the 5-year average.

The 10 Day forecast at the link below does support the CelsiusEnergy forecast.
https://weather.com/maps/tendayforecast

Total storage capacity in the U.S. is ~4,200 Bcf.

After November 14th, with just normal winter weather over the following six weeks, the surplus to the 5-year average should be gone by year-end. If this comes to pass, the increasing LNG exports should push storage levels well below the 5-year average in Q1 2026. That's when the "Fun Begins".

Its all up to Old Man Winter.