Natural Gas Supplies Unexpectedly Fall Further Below 5 Yr. Avg!

(My reports focus on Natural Gas as it is the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)

In my July 23^rd Energy Update, I said very warm weather since the end of April inhibited rebuilding Natural Gas supplies. I estimated based on NOAA’s weather forecasts, supplies were expected to remain 516 Bcf below the 5-Yr. Avg, which was virtually where they were near the end of April and needed to increase weekly 43 Bcf more than the 5-Yr. Avg. from Aug 10^th thru Nov 2^nd to return to the 5-Yr. Avg., before the start of the winter heating season, which was a virtual impossibility.

But I did not anticipate the situation would worsen with supplies now projected to be 600 Bcf below the 5 Yr. Avg! Based on NOAA’s present weather forecasts below is an estimate of Natural Gas supplies from Aug 10^th thru August 31st compared to the 5-Yr. Avg.:

As you can see below, the slower than expected growth in Natural Gas supplies over the last 3 weeks, triggered a rally in nearby Natural Gas prices:

Since July 23^rd, the nearby contract of Natural Gas increased from $2.70 to $2.92 per MMbtu and based on present weather forecasts supplies are expected to remain 600 Bcf below the 5 Yr. Avg. until the end of August! This is unprecedented; therefore, the risk of higher prices continues to increase. But the good news is as I explained in my last 2 reports due to a market phenomenon called “Backwardation”, hedgers can secure rates below present levels in the forward market.

Below is a summary of the backwardation in Natural Gas:

Present   – $2.92 per MMbtu
Apr 2019 – $2.69 per MMbtu
Apr 2020 – $2.54 per MMbtu
Apr 2021 – $2.48 per MMbtu

The price of Natural Gas is lower in the forward markets, and although since July 23^rd, the nearby contract increased 8% going from $2.70 to $2.92 per MMbtu, rates in the forward markets remain very attractive. They are lower than where they were nearly 95% of the time over the last 18 years. The old proverb, “A Bird in the Hand is Worth Two in the Bush” is as true today as in the 16^th century and hedgers will benefit by reserving rates longer-term while they are below nearby rates, and not delay hoping for lower rates in the future.

Conclusions:
 
This year’s extremely hot summer has resulted in very tight Natural Gas supplies, and although no one can absolutely predict the future, rates in the forward markets are lower than where they were nearly 95% of the time over the last 18 years and with supplies projected to remain 600 Bcf below the 5 Yr. Avg. until the end of August and stay far below normal as we start the winter heating season, we recommend hedgers secure rates now.

 Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

 
Ray Franklin
North American Energy Advisory
Senior Commodity Analyst