Energy Update | July 1st, 2019

Energy Update
July 1st, 2019

Are Natural Gas Prices Below $2.50 Per MMBtu A Rare Buying Opportunity?

(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 June 19^th Energy Update, I said during this year’s “Spring Shoulder Period” Natural Gas held above $2.50 per MMBtu until May 31^st and has traded below this key support level as I write today’s report. This is significant because since 2000, there were only 3 previous periods when Natural Gas traded below $2.50 per MMBtu, and it always preceded much higher prices for an extended period.

In my May 29^th Energy Update, I explained why I believe prices will be higher longer-term, and the longer prices remain near today’s very low levels the higher they will go in the future.

My analysis was based on 4 Fundamental Facts: 

1. The production of Natural Gas requires a large amount of ongoing capital investment (CAPEX). New wells must constantly be drilled to replace the huge volumes lost due to well depletions. When Natural Gas prices are high Exploration & Production companies have sufficient cash for the capital investment needed to drill new wells, but when prices are low, capital investment for new wells decline.

2. Demand for Natural Gas is expected to continue increasing due to exports of Liquified Natural Gas overseas, increased pipelines to Mexico and switching from Coal to Natural Gas for electric power generation.

3. Low Natural Gas prices has led to the ominous combination of E&P companies decreasing CAPEX resulting in less production, while increasing demand for exports and power for electric power generation. This combination is forcing many E&P companies to turn to debt for the capital needed to maintain production.

4. Low prices are a threat to many E&P companies’ long-term survival, which is demonstrated by the fact that over the last 3 years more than 100 Oil and Gas and companies have declared bankruptcy from January 2015 through December 2018, and Oil and Gas bankruptcies are accelerating.

Based on the 4 above facts, I believe Natural Gas’s present prices below $2.50 per MMBtu are offering hedgers a rare buying opportunity to lock in rates below where they will average longer-term.

The chart below is a picture of what has taken place in the past when Natural Gas declined to near present price levels:

Natural Gas prices below $2.50 per MMBtu is rare occurring only in 2001, 2012 and 2016, and always preceded multiyear periods of higher prices. Therefore, based on this empirical evidence there is no reason to believe today’s low prices will not lead to much higher prices long-term.

The only question is how long will Natural Gas prices remain below $2.50 per MMBtu?

No one knows the answer because weather factors influence prices short term, but as I previously stated the longer prices remain near today’s very low levels the higher, they will go long-term.

Conclusions:

Natural Gas prices below $2.50 per MMBtu is a rare occurrence and although it is possible prices could decline slightly from present levels, the longer they stay low, the higher prices will go long-term. Therefore, I recommend anyone with agreements expiring within the next 18-months not delay hoping for lower prices, and reserve energy at today’s very low prices to be available when their present agreements expire. The upside risk is too great to justify waiting for slightly lower prices.

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