Energy Update | February 6th, 2019

Energy Update
February 6th, 2019

Natural Gas Prices Break Below Trendline, But Further Declines Likely Limited.

In my Jan 30^th Energy Update, I said it was only a matter of time before prices in the forward markets increase based on fundamentals, and the volatility we are experiencing this winter is a harbinger of a new paradigm in which supply/demand imbalances will periodically result in explosive price increases similar to 2000 thru 2010.

But as you can see in the 12-month chart below, Natural Gas prices have broken below the trendline in place since early 2018. In today’s report I explain why further declines will likely be limited, and hedgers should take advantage of the low prices presently available.

Breaking a 12-month trendline is significant, but as you can see in the 5-year chart below a longer-term support level is lurking just below today’s prices:

Natural Gas reached a 17-year low in Mar 2016, but within 3 months prices were above $2.50 per MMBtu and has held this key support level a number of times since June 2016. I believe we will likely again hold above this price level, and even if we don’t any decline below $2.50 per MMBtu will be short lived. As I have explained in previous reports, Exploration and Production Companies cannot generate profits below $3.00 per MMBtu; therefore, prices this low are a disincentive to production, and since demand is expected to continue increasing due to exports of Liquified Natural Gas overseas, increased pipelines to Mexico and electric power generation resulting in structural imbalances, the average price of Natural Gas will likely be higher in 2019 and beyond.

This is why as shown in the 19-year chart below, declines below $2.50 per MMBtu are not sustained, and are always followed by significantly higher prices:

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; therefore, I recommend anyone with Natural Gas or Electricity agreements expiring within the next 18-months, take advantage of today’s low prices and reserve energy to be available when their present agreements expire.

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