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Energy Update | 11 Nov, 2020

Mild November Weather Resulting in a Natural Gas Buying Opportunity? https://youtu.be/LCUgXR2Yegs In my Oct 27th Energy Update, I said we

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Mild November Weather Resulting in a Natural Gas Buying Opportunity?

In my Oct 27th Energy Update, I said we were likely in the early stages of a cyclical bull market and based on the EIA’s long-term production and demand estimates we will experience Natural Gas supply deficits in 2021, increasing the risk of higher prices long-term. Therefore, I recommended securing fixed rates prior to the winter heating season.

But since my last report, based on NOAA weather projections, we will experience milder than normal weather in the United States thru Nov 23rd, as you can see in the graphic to the right.

And not surprisingly milder than normal weather resulted in Natural Gas prices pulling back from recent highs.

Upon looking at the below chart, you may hesitate locking in rates now because they are higher than the Fall low.

 

Natural Gas Graph

But hopefully after looking at the 5-Year Natural Gas chart below you will appreciate the wisdom of securing rates prior to the Winter heating season.

Natural Gas Graph

It is not uncommon for Natural Gas to experience small mild weather pullbacks during cyclical bull markets. The brief pullback in June 2016, was due to mild weather prior to the Summer heating season, but as demand increased in the Summer, prices increased.

This year we also experienced a small decline due to mild weather in November, but as demand increases this Winter prices will likely increase. 

As I said in my last report, no one can predict exactly where prices will be in the future, the following is a list of five risk factors that may lead to higher prices.

  1. Year-over-year, we have 67% less active Oil rigs and 45% less Gas rigs; therefore, the EIA is forecasting Natural Gas production will be sharply lower this Winter and into 2021.
  1. In 2016 when active Oil & Gas rigs were this low the average price of Natural Gas and Electricity were higher the next 3 years.
  1. Demand for Natural Gas is highest during the Winter; therefore, if we experience a colder than normal Winter, prices would likely be much higher.
  1. The possibility a ban on fracking by a new administration would lead to decreased production and increased prices.
  1. The uncertainty of PJM Capacity Auctions being delayed that could result in higher supplier prices.

The above list of risk factors continues to be the basis of my recommendation for anyone who has not already secured a fixed Natural Gas or Electricity rate, do so as soon as possible.

Conclusion

Based on the EIA’s long-term Natural Gas production and demand estimates we likely are in the early stages of a cyclical bull market, and during cyclical bull markets it is wise to consider all short-term pullbacks as buying opportunities. Therefore, I recommend taking advantage of the recent small mild weather pullback and secure fixed Natural Gas and Electricity rates prior to the winter heating season. My concern is the longer you delay, the more you may pay later.

Not every client’s risk tolerance and hedging strategy is 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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