Freeport LNG Explosion Slows Natural Gas Rally, But Risk Remains For Higher Prices This Summer

In my May 31st  Energy Update, I discussed three risk factors that increased the risk Natural Gas would be higher

In my May 31st  Energy Update, I discussed three risk factors that increased the risk Natural Gas would be higher this summer. Last week, after reaching a 14-year high of $9.66 per MMBtu, one of America’s largest Liquified Natural Gas processing facilities experienced an explosion, which near-term will lower LNG exports and slow the draw of America’s supplies.

Upon hearing the news Natural Gas initially declined nearly 17% to $8.02 per MMBtu before stabilizing and starting this week trading near the average price the EIA forecasted in their May 10th Short-Term Energy Outlook for the second half of 2022:  

Natural Gas Market Graph

If you look closely at the above chart, you will note last week Natural Gas declined to the 40-day moving average, and this moving average appears to be significant for trend followers. A classic pattern of Bull Markets is they trend higher, and declines are supported near key moving averages.

The question is what should be considered a key near-term moving average support area for Natural Gas?

The answer can be found by identifying a moving average where prices rallied from after major news events. As you can see in the above chart,  prices held the 40-day moving average over the last four months and most recently after two major news events. The EIA’s May 10th Short Term Energy Outlook (STEO), and last week after Freeport’s LNG facility explosion.

As discussed in the May 16th Energy Update, the market’s hope for lower prices was adversely impacted by the EIA’s May 10th Short Term Energy Outlook (STEO). In this report, the EIA said they expected Henry Hub prices would average $8.59/MMBtu in the second half of 2022, and after the report, Natural Gas rallied off the 40-day moving average at $6.43 per MMBtu.

The EIA’s (STEO) also warned Natural Gas could rise significantly above forecasted levels if summer temperatures were hotter than assumed in their forecast. Therefore, it was not surprising Natural Gas rallied after the report, but what is significant is Natural Gas held and rallied off  the 40-day moving average. 

The second major news event was after last week’s explosion at the Freeport LNG facility Natural Gas initially plunged, but held and rallied off the 40-day moving average. I believe Natural Gas initially declined after the news, but then rallied due the three risk factors discussed in the May 31st Energy Update.

There is no guarantee the 40-day moving average will not be breached before the final 2022 high, but because of the three risk factors discussed in the May 31st Energy Update, the potential for significantly higher prices remain. Therefore, as I have said in recent reports If you have agreements expiring within the next few months, you should consider securing longer-term agreements since prices in the forward markets are still lower from 2023 thru 2026 than where they are today:

Month

2022

2023

2024

2025

2026

Jan

 

9.06

6.43

5.72

5.58

Feb

 

8.76

6.26

5.59

5.35

Mar

 

7.91

5.78

5.29

5.08

Apr

 

6.03

4.97

4.71

4.55

May

 

5.84

4.92

4.64

4.52

Jun

 

5.89

4.95

4.68

4.59

Jul

8.82

5.93

5.01

4.71

4.65

Aug

8.84

5.92

5.02

4.72

4.67

Sep

8.81

5.99

4.99

4.71

4.67

Oct

8.8

5.94

5.06

4.78

4.73

Nov

8.87

6.16

5.21

4.97

4.92

Dec

8.94

6.38

5.56

5.32

5.27

AVG

8.85

6.65

5.35

4.99

4.88

Also, as I said in recent reports, when appropriate our consultants can help you secure blend and extend agreements to take advantage of the expected sharp pullback when it finally comes. The bottom line is we are living in a period of great uncertainty, and we are here to help you navigate these perilous times 

Not every client’s risk tolerance and hedging strategy are 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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