In my June 13th Energy Update, I said after the explosion at Freeport LNG, Natural Gas declined to the 40-day
In my June 13th Energy Update, I said after the explosion at Freeport LNG, Natural Gas declined to the 40-day moving average, and this moving average appeared to be significant for trend followers. But I also said there was no guarantee the 40-day moving average would not be breached before the final highs were reached in 2022. The three risk factors discussed in the May 31st Energy Update would likely support higher prices after a pullback.
After last week’s report, Freeport LNG announced the damage at its plant would keep it fully offline until late September with only partial operation returning through year-end. Natural Gas immediately breached the 40-day moving average and after briefly rallying the next day to test this key moving average it resumed its decline to close the week below $7 per MMBtu.
In today’s report, I discuss why although the delay in reopening Freeport LNG lowers the risk of higher prices this summer, they have not been eliminated, and why it may increase the long-term risk.
I.
First, regarding why although the delay in reopening does reduce the risk of higher Natural Gas prices this summer, the risk of higher prices has not been eliminated.
In my May 31st Energy Update, I discussed three risk factors increasing the risk Natural Gas could be higher this summer. The first factor was the EIA’s May 10th Short Term Energy Outlook (STEO) forecasting supplies would start the summer cooling period 14% below the 5-year average and Natural Gas would respond by averaging $8.59/MMBtu in the second half of 2022.
But the delay in reopening Freeport LNG, which accounts for about 20% of U.S. LNG exports decreases exports of LNG overseas by nearly 2 Bcf/d allowing more supplies to remain in storage in the U.S. for the generation of electricity. While this will likely decrease the supply deficit to the 5-year average, it is not expected to totally eliminate it.
Goldman Sachs Commodities Research following the latest Freeport outage news revised its end-October storage estimate to just over 3,500 Bcf, versus 3,424 Bcf predicted in April. “This remains a low storage level relative to history,” Goldman analysts Samantha Dart, Damien Courvalin, and Romain Langlois said in a research note, and should our U.S. Natural Gas balances be tighter than expected in the coming months, the risk remains that U.S. Natural Gas prices may need to trigger max substitution towards Appalachia coal, which we estimate would require a sustained gas price rally to around $12/MMBtu.”
The question is even with the delay in reopening Freeport LNG, what would cause supplies to be tighter than expected this summer?
The answers are found in the second and third risk factors discussed in the May 31st Energy Update. NOAA’s forecast of a warmer than normal summer increasing Natural Gas demand and NOAA’s forecast of an active hurricane season with very intense storms possible due to loop current in the Gulf leading to hurricanes similar to Katrina in 2005, resulting in supply disruptions and higher Natural Gas prices.
Therefore, although the delay in reopening Freeport LNG does lessen the risk of higher Natural Gas prices this summer, the risk for higher prices is still higher than normal, and longer-term the delay in reopening could increase the risk of higher Natural Gas prices long-term.
But the delay in reopening Freeport LNG, which accounts for about 20% of U.S. LNG exports decreases exports of LNG overseas by nearly 2 Bcf/d allowing more supplies to remain in storage in the U.S. for the generation of electricity. While this will likely decrease the supply deficit to the 5-year average, it is not expected to totally eliminate it.
Goldman Sachs Commodities Research following the latest Freeport outage news revised its end-October storage estimate to just over 3,500 Bcf, versus 3,424 Bcf predicted in April. “This remains a low storage level relative to history,” Goldman analysts Samantha Dart, Damien Courvalin, and Romain Langlois said in a research note, and should our U.S. Natural Gas balances be tighter than expected in the coming months, the risk remains that U.S. Natural Gas prices may need to trigger max substitution towards Appalachia coal, which we estimate would require a sustained gas price rally to around $12/MMBtu.”
The question is even with the delay in reopening Freeport LNG, what would cause supplies to be tighter than expected this summer?
The answers are found in the second and third risk factors discussed in the May 31st Energy Update. NOAA’s forecast of a warmer than normal summer increasing Natural Gas demand and NOAA’s forecast of an active hurricane season with very intense storms possible due to loop current in the Gulf leading to hurricanes similar to Katrina in 2005, resulting in supply disruptions and higher Natural Gas prices.
Therefore, although the delay in reopening Freeport LNG does lessen the risk of higher Natural Gas prices this summer, the risk for higher prices is still higher than normal, and longer-term the delay in reopening could increase the risk of higher Natural Gas prices long-term.
II.
Why would a delay in the reopening of Freeport LNG Potentially increase the risk of higher prices long-term?
The delay in reopening Freeport LNG increases the risk of higher Natural Gas prices worldwide this winter. The Natural Gas supply crisis was already brewing for European countries due to their green energy policies resulting in lower-than-normal storage levels, which were magnified by disruptions in the importation of Russian Natural Gas after the invasion of Ukraine.
After the announcement Freeport LNG reopening would not be fully operational until the end of 2022, Natural Gas prices skyrocketed in Europe and are up over 50% since the announcement. European markets are responding to the fear with supplies only at 35% capacity they could be facing an energy crisis this winter.
Therefore, it is expected their demand for U.S. Natural Gas will remain high for the foreseeable future, but there are concerns that our ability to meet their demand will be severely hampered by our present administration’s energy policies.
In my April 11th Energy Update, I explained why the present administration’s fiscal and energy policies increased the risk we are returning to a period of high prices and volatility similar to 2001 to 2011 as America moves away from fossil fuel to green energy policies
Natural Gas has steadily increased since the present administration’s inauguration and the policies described in the April 11th Energy Update remain in place. And as discussed, the delay in reopening Freeport LNG increases the risk of higher worldwide prices long-term and our present administration energy policies may hamper our ability to meet Europe’s supply shortfall.
Therefore, as I have previously reported If you have agreements expiring within the next few months, I recommend you take advantage of last week’s decline in domestic Natural Gas prices and secure longer-term agreements that include lower prices in the forward markets from 2023 thru 2026
Month | 2022 | 2023 | 2024 | 2025 | 2026 |
Jan |
| 7.15 | 5.61 | 5.28 | 5.19 |
Feb |
| 8.76 | 5.45 | 5.16 | 5.07 |
Mar |
| 6.24 | 5.09 | 4.86 | 4.81 |
Apr |
| 4.99 | 4.49 | 4.33 | 4.32 |
May |
| 4.89 | 4.43 | 4.28 | 4.29 |
Jun |
| 4.95 | 4.48 | 4.35 | 4.36 |
Jul | 6.94 | 5.02 | 4.54 | 4.41 | 4.42 |
Aug | 6.91 | 5.01 | 4.55 | 4.44 | 4.44 |
Sep | 6.86 | 4.98 | 4.53 | 4.43 | 4.43 |
Oct | 6.85 | 5.02 | 4.59 | 4.49 | 4.51 |
Nov | 6.94 | 5.22 | 4.76 | 4.67 | 4.69 |
Dec | 7.06 | 5.49 | 5.11 | 5.03 | 5.04 |
AVG | 6.93 | 5.64 | 4.81 | 4.64 | 4.63 |
Also, as I said in recent reports, when appropriate our consultants will also help you secure blend and extend agreements to take advantage of a sharp longer-term pullback when it finally comes. The bottom line is we are living in a period of great uncertainty, and we are here to help you navigate these perilous times
Not every client’s risk tolerance and hedging strategy are the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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