The prompt month futures NYMEX natural gas price at the Henry Hub is at record contango relative to the December 2024 futures contract as measured on a ratio or percentage basis.
The record contango percentage has been very persistent on a year-to-date basis so far in 2024. The record contango percentage of the prompt April 2024 contract to the December 2024 contract means that storage operators are making record high percentage profit margins on their working gas storage assets. It also explains why producers such as Chesapeake Energy are now using their production to take advantage of their synthetic storage optionality.
Chesapeake as a producer is implicitly trying to capture the intrinsic and extrinsic value of their storage optionality by completing wells but not TILing (Turn-In-Line) their wells until market prices are more favorable. Once natural gas prices are more favorable, Chesapeake Energy will TIL their wells as quickly as possible. In the meantime, Chesapeake Energy can preemptively short delta hedge deferred futures contract months such as the December 2024 contract where natural gas production is in the money at $3.42 / MMBtu. The preemptive short hedge is done in anticipation of TILing wells in the future. If prices stay profitable enough by November 2024, the wells can be TILed and Chesapeake will be able to lock in their production at a significant profit. If natural gas prices go back down by the end of November 2024, Chesapeake Energy can at least cover their preemptive short hedges for a nice profit even if prices aren’t attractive enough by November 2024 to TIL their completed wells.
Oil Fracs & Gas Fracs
Frac crews in wells that are mostly oil-based are up year-to-date so far in 2024 while frac crews in wells that are mostly natural gas-based are down year-to-date in 2024. Data is provided by Hyperion.
Natural gas frac crews are declining since natural gas prices have cratered and are currently well below the cost of new natural gas dominant wells. The average cost of a new natural gas dominant well is around $2.30 / MMBtu and prompt month futures natural gas prices are around $1.70 / MMBtu. Oil based frac crews are rising because oil prices have been going up and are well above the cost of new oil focused wells. The average cost of a new oil-based well is around $40 / Bbl and prompt month futures oil prices are currently trading around $81 / Bbl.
