Energy Update | December 2nd, 2019
Today’s Low Prices Increases Probability Prices Will Be Higher Long-Term In my November 4th Energy Update, I said if cooler
Today’s Low Prices Increases Probability Prices Will Be Higher Long-Term In my November 4th Energy Update, I said if cooler
In my November 4th Energy Update, I said if cooler than normal weather throughout much of the U.S. was followed by mild weather, prices may again decline short-term. But if prices stay near or below $2.50 per MMBtu, as explained in my July 1st Energy Update, it would threaten the long-term survival of many E&P companies and their ability to maintain present levels of production.
Since writing that report, we have experienced warmer than normal weather in November, which is expected to continue into mid-December, as you can see in the graph to the right.
As you can see in the chart below, this extended period of warm weather triggered another sharp decline below $2.50 per MMBtu:
The question is, is there evidence the recent sharp break in Natural Gas prices are threatening the survival of E&P companies and subsequently their ability to maintain their present levels of production?
I believe the answer is absolutely yes, and a vivid example is Chesapeake Energy!
Chesapeake Energy was a pioneer in the development of hydraulic fracking, which led to explosive growth in the production of Natural Gas. In 2010, they were the 2nd largest producer of Natural Gas in the United States but their production is down nearly 25% since 2010 and they now may need to file for bankruptcy if Natural Gas prices don’t increase substantially from present levels. Chesapeake Energy is not alone as at least 40 energy companies have filed bankruptcy in 2019 and more will need to if prices remain below their production cost. The net effect of today’s low prices is E&P CAPEX continues to decline as evidenced by Baker Hughes latest drilling data revealing Natural Gas drilling rigs have decreased from 194 to 129 rigs down 33.5% year-over-year.
The sharp decline in Natural Gas rigs will likely lead to decreased production in 2020 and with demand expected to continue increasing due to increased exports of Liquified Natural Gas, pipelines to Mexico and switching from Coal to Natural Gas for electric power generation, I believe Natural Gas prices will increase long-term.
The question is, when will prices rally and remain decisively above $2.50 per MMBtu?
In the near-term, weather factors continue to dominate the short-term direction of Natural Gas prices, but if recent warm weather is followed by colder than normal weather prices are poised to move much higher from their present low levels. Last year colder than normal weather in November and early December triggered an explosive rally, but the rally was not sustained when after mid-December, the winter was warmer than normal; therefore, prices declined into the spring.
And as you can see this year a warmer than normal November and early December have resulted in prices again declining below $2.50 per MMBtu, but if we experience a colder than normal winter prices will likely rally far above $2.50 per MMBtu.
But when will prices remain decisively above $2.50 per MMBtu?
I believe the answer to this question is when the market realizes production of Natural Gas is no longer increasing due to the factors discussed at the beginning of this report. The sharp decline in Natural Gas rigs will eventually lead to decreased production in 2020 and with demand for Natural Gas continuing to increase due to increased exports of Liquified Natural Gas, pipelines to Mexico and switching from Coal to Natural Gas for electric power generation, Natural Gas prices will remain decisively above $2.50 per MMBtu long-term.
Today’s low Natural Gas prices are causing E&P CAPEX to decline as evidenced by Baker Hughes latest drilling data revealing Natural Gas drilling rigs have decreased from 194 to 129 rigs down 33.5% year-over-year. The sharp decline in rigs will eventually lead to decreased production in 2020 and with demand expected to continue increasing due to increased exports of Liquefied Natural Gas, pipelines to Mexico and switching from Coal to Natural Gas for electric power generation, I believe Natural Gas prices will increase long-term.
In the near-term, weather factors will influence the direction of energy prices, but if we experience a colder than normal winter Natural Gas prices are poised to move much higher from today’s very low-price levels.
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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