Energy Update | March 2nd, 2020
Natural Gas Price of $1.642 per MMBtu is Lowest Inflation Adjusted Price in History! In my Feb 25th Energy Update,
Natural Gas Price of $1.642 per MMBtu is Lowest Inflation Adjusted Price in History! In my Feb 25th Energy Update,
In my Feb 25th Energy Update, I gave 2 reasons why I believe Natural Gas prices were too low and poised to move much higher soon. The first was prices were unsustainably low as they were below the cost of production, and companies are no longer profitable. Weaker companies will not survive, and companies who survive will be highly motivated to decrease production leading to higher prices. The second reason was based on quantitative analysis in which I showed today’s Natural Gas supplies versus price do not justify prices below $2.00, and prices should be closer to $3.00 per MMBtu.
In today’s report, I give further evidence supporting why I believe Natural Gas will be much higher soon based on the fact Natural Gas’s recent price of $1.642 per MMBtu is its lowest inflation adjusted price in history:
In my last report, I said in 2016 Natural Gas declined to $1.611 per MMBtu on Mar 4th, which was its lowest price since 2000. I said the low price could be justified by a record amount of storage at the end of the winter heating season. We had experienced the warmest winter on record, and supplies closed the winter heating season with 2,468 Bcf in storage, which was 45.3% above the 5-year average.
On Friday, we reached $1.642 per MMBtu, which is not justified by today’s supply levels that are estimated to close the winter heating season 8% above the 5-year average. And if we adjust for the CPI inflation rate of 1.82% since Mar 2016, in today’s dollars, the inflation adjusted price in March 2016 of $1.611 would be $1.732. Therefore, the $1.642 low reached Friday was lower than the $1.611 low in 2016 and in fact is the lowest inflation adjusted price for Natural Gas since it started trading in 1990! We must first understand how low prices are today before evaluating where prices will likely go in the future.
I believe today’s low Natural Gas prices are unprecedented and prices will be much higher by the end of this year. But if you are not already convinced let me share with you another historical example of why I believe prices will not stay below $2.00 per MMBtu and are poised to move much higher soon and approach $4.00 per MMBtu by the end of the year.
In previous reports, I explained in the last 20-years Natural Gas prices were below $2.00 per MMBtu only 1.8% of the time and the 3 previous occurrences always led to higher prices on average the following 12, 24 & 36 months. In my Feb 25th Energy Update, I referred to one of the 3 previous occurrences that took place in 2016. Today, I will give you the second of the three examples, which took place in 2012.
The winter of 2011/12 was very similar to the winter 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:
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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