Energy Update | March 24th, 2020
Corona Virus Delays Natural Gas Rally, But Evidence for Higher Prices Increases! https://youtu.be/uRTarUY20iI In my Mar 2nd Energy Update, I
Corona Virus Delays Natural Gas Rally, But Evidence for Higher Prices Increases! https://youtu.be/uRTarUY20iI In my Mar 2nd Energy Update, I
In my Mar 2nd Energy Update, I gave you the second of the three examples, since 2000 when Natural Gas prices declined below $2.00 per MMBtu, which occurred in the spring of 2012.
I said the winter of 2011/12 was very similar to the third example of 2015/16. It was the warmest winter in 100 years, and we closed the winter heating season with 2.479 Bcf in storage, which was 49.1% above the 5-year average. Also, in 2012 fracking was becoming the dominant production source of Natural Gas resulting in the largest yearly increase of production in history. One might have argued in the spring of 2012 that although prices were very low, they would not increase substantially due to the production increases anticipated in 2012 from fracking.
But in 2012, prices sharply increased after briefly trading below $2.00 per MMBtu:
In today’s report, I explain why the economic shutdown caused by the Corona virus pandemic may have delayed a rally in Natural Gas, but the evidence supporting much higher Natural Gas prices continues to grow.
As you know in the last month markets all over the world collapsed. The collapse has not only impacted stock markets, but commodity markets such as Gold and Silver, which traditionally are considered flight to safety investments also declined. During times of uncertainty and fear markets can act irrationally with investors selling everything and move into cash.
I believe this explains the irrational decline of Natural Gas to a new low of $1.518 per MMBtu on Monday:
As I explained in my March 2nd Energy Update, if we adjust for inflation the $1.642 low reached Feb 28th was the lowest inflation adjusted price for Natural Gas since it started trading in 1990. But as you can see in the above chart, after rallying to $2.00 per MMBtu, Natural Gas prices again declined and it’s low on Monday at $1.518 per MMBtu was reached simultaneously with the stock market’s reaching its lowest price since 2016.
I learned over the years the best buying opportunities often occur when supply/demand fundaments for a commodity don’t justify it declining in sympathy with other markets. I believe this is exactly what we have in Natural Gas. Before declining to $1.518 per MMBtu, Natural Gas prices were already the lowest since it began trading in 1990, and since we know the previous 3 price declines below $2.00 per MMBtu were always followed by much higher prices, the empirical evidence strongly supports much higher prices by the end of 2020 and higher prices on average over the next 3 years.
As I previously pointed out, the clearest example was 2012 when prices were below $2.00 per MMBtu due to the warmest winter in 100 years and supplies at the end of the winter heating season were 49.1% above the 5-year average. Also, in 2012 due to fracking we experienced the largest yearly increase in Natural Gas production in history and prices still approached $4.00 per MMBtu by the end of the year.
This year mild weather in March increased the estimated surplus at the end of the winter heating season from 8% to 18% above the 5-year average, but this is still far below 2012 when supplies were 49.1% above the 5-year average. But the most compelling factor supporting much higher Natural Gas prices this year is in 2012 production was about to explode and prices still approached $4.00 per MMBtu, while this year production is expected to decline.
Therefore, with Natural Gas prices the lowest since they began trading in 1990, and supplies much higher than previous years when prices were below $2.00, and production projected to decrease, where do you think prices will be at the end of 2020?
As I said in my last report, anyone who hesitated to lock in the low rates early in 2012 paid dearly by the end of the year. There are times when a commodity must increase simply because it is just too darn low! Hopefully if you have not already locked in today’s low rates you will not repeat the mistake of those who hesitated in 2012.The upside risk is too great to justify waiting hoping 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
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