Energy Update | February 25th, 2019

Energy Update
February 25th, 2019

Natural Gas Holding Above Long-Term Support Near $2.50 per MMBtu.

In my Feb 6^th Energy Update, I explained why further declines would likely be limited, and hedgers should take advantage of the low prices presently available. As you can see below, since writing this report Natural Gas prices have held above long-term support near $2.50 per MMBtu:

In today’s report, I explain why it is not surprising Natural Gas held above long-term support near $2.50 per MMBtu, but recent price action might be signaling Natural Gas could trade below below $2.50 per MMBtu and why if this happens it would insure much higher prices for an extended period of time.

Recently we have experienced colder than normal weather throughout most of the United States, which is expected to continue into the middle of March, and if correct will increase heating demand resulting in Natural Gas supplies plunging to 600 Bcf below the 5-Yr. Avg. by March 15th. Therefore, it is not surprising Natural Gas held above long-term support near $2.50 per MMBtu, but frankly I am surprised prices are not much higher considering we would be approximately 35% below the 5-Yr. Avg as we near the end of the winter heating season.

The question is with supplies so low, why are Natural Gas prices not much higher? The answer is the assumption by many that production will continue increasing unabated and when mild weather arrives in April demand will decrease; therefore, supplies will be quickly replenished. The problem with this assumption is although heating demand will certainly decrease during the spring, demand of exports for Liquified Natural Gas overseas, and exports to Mexico due to increased pipelines are expected to continue increasing, and the low price of Natural Gas versus Coal is an incentive to use Natural Gas as a power source for the generation of Electricity.

Based on those factors, Natural Gas supplies may not grow as quickly as anticipated and if we enter the summer cooling season with lower than normal supplies and have a warmer than normal summer prices would likely move significantly higher. Obviously, this is all speculation, and no one knows with any certainty how warm or mild a summer we will have this year, but one thing is certain, if prices decline from present levels it will likely insure much higher prices for an extended period of time. I based this conclusion on the empirical evidence contained in the 19-year chart of Natural Gas below:

Since 2000, there were 3 periods when Natural Gas was below $2.50 per MMBtu for a few months, and as you can see in the above chart Natural Gas prices below $2.50 per MMBtu always preceded significantly higher prices for an extended period of time. As I explained in my Feb 6^th Energy Update, over the last 19 years, Natural Gas prices have been above $2.50 per MMBtu 95% of the time, which is not surprising since suppliers cannot generate profits when prices are this low.

Conclusions:

Although it is possible Natural Gas prices could decline marginally from present levels, I recommend anyone with Natural Gas or Electricity 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