Energy Update | 18 January, 2021
If the EIA’s Latest Energy Outlook is Correct Structural Imbalances Will Result in Higher Natural Gas Prices in 2021 In
If the EIA’s Latest Energy Outlook is Correct Structural Imbalances Will Result in Higher Natural Gas Prices in 2021 In
In my Jan 4th Energy Update, I said a common pattern repeated early in bull markets is a series of higher highs and higher lows and Natural Gas has been closely following this common bull market pattern. As you can below, Natural Gas continues to follow this pattern of higher highs and higher lows:
I also said if the EIA’s recent forecasts are correct, then we likely are in the early stages of a rally to a higher high above $3.34 per MMBtu. Last week, the EIA released their latest Short Term Energy Outlook (STEO) and continue forecasting lower production and increased exports in 2021 will result in Natural Gas increasing 48% in 2021.
In today’s report, I dig deeper into the EIA’s STEO and explain why if their 2021 Supply/Demand estimates are correct, it will result in structural imbalances that will validate the EIA’s forecast Natural Gas will be higher in 2021.
The EIA estimates United States consumption including residential, commercial, industrial usage, and power for the generation of Electricity will decrease 2.3 Bcf/d in 2021. But the decrease in consumption will be offset by the EIA’s forecast production will decrease 2.6 Bcf/d in 2021.
But this is only part of the story, the EIA continues to forecast exports will increase in 2021. Their latest forecast indicates net Natural Gas exports will rise from an average of 6.5 Bcf/d in 2020 to 9.8 Bcf/d in 2021 resulting in a drawdown in supplies of 3.3 Bcf/d. The combination of decreased production and increased exports in 2021 will overwhelm the expected small decreases in consumption and result in structural imbalances over the next year.
The EIA estimates at the end of 2020, working Natural Gas inventories were 3,375 Bcf, which was 6% more than the five-year. But based on the structural imbalances forming in 2021, they expect total inventories will be 1,620 Bcf by the end of March, which would be 12% below the five-year average for that time of year. If as expected structural imbalances continue in the second and third quarters of 2021 it will result in Natural Gas being undersupplied as we prepare for the winter heating season of 2021, and the risk of higher Natural Gas prices in 2021 and 2022 will increase.
In previous reports, I pointed out Natural Gas only traded below $2.50 per MMBtu three times, in 2001, 2012 and 2016, and it always preceded higher prices for at least three years. And as you can see below, in each instance the bull markets started with similar patterns of higher highs and higher lows:
Based on the EIA’s recent supply/demand estimates, in the near-term, I believe Natural Gas will remain in its present pattern of higher highs and higher lows, and trade above $3.34 per MMBtu by the end of the first quarter. Longer-term the EIA expects structural Imbalances in 2021 will continue into 2022; therefore, they estimate Natural Gas prices will continue increasing in 2022. If their estimates are accurate the price of Natural Gas is extremely undervalued and will rise significantly from present levels both short and long term
The EIA’s most recent STEO increases the probability that Natural Gas will experience structural imbalances this year, which greatly increases the risk of much higher prices in 2021. Weather factors will influence the direction of energy prices near-term but based on the EIA’s supply/demand estimates and Natural Gas’s historical pricing over the last 20 years, the downside reward potential of lower prices short-term is minimal versus the upside risk of higher prices long-term.
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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