High European Natural Gas Prices a Warning for America?
In the Oct 3rd Energy Update, I explained why I believe the unwinding of storm risk premium was a long-term
In the Oct 3rd Energy Update, I explained why I believe the unwinding of storm risk premium was a long-term
In the Oct 3rd Energy Update, I explained why I believe the unwinding of storm risk premium was a long-term opportunity to lock in fixed rates for Natural Gas and Electricity.
My reasoning was primarily based on the April 11th Energy Update, which explained in detail why our present administration’s move towards green energy and away from fossil fuels was returning America to a period of high prices and volatility:
In my last report, I said the present administration’s commitment to green energy increases the probability the next three years will be characterized by wild swings in energy prices, and securing fixed rates when prices pull back will be in your best interest.
In 2020 and 2021, the policies introduced by the European Commission based on the politics of Climate Change led to less investment capital for Europe’s energy sector; therefore, they couldn’t address their supply/demand needs over the last year.
In my Oct 4th, 2021, Energy Update, I explained why I believed the risk of higher Natural Gas and Electricity prices was increasing short-term and long-term. Green energy policies implemented in Europe over the last year resulted in their Natural Gas supplies being at a 10-year low as they enter their winter heating season.
They have been desperately trying to import Liquefied Natural Gas (LNG) to make up the gap, and U.S. Liquefied Natural Gas exports are hitting record levels to help them make up the deficit. The increased demand for LNG worldwide is resulting in record-high prices in Europe and could also result in higher prices in the U.S. But for me, the major long-term concern is that the policies leading to this present crisis are not abating, they are becoming more entrenched here and abroad.
The graph below shows what has happened to Europe’s Natural Gas prices due to their Green Deal policies. From Nov 3rd, 2020, to Oct 4th, 2021, their Natural Gas prices increased by 600% and are presently 950% higher since Nov 3rd, 2020:
After the inauguration of the present administration on Jan 20th, 2021, America has instituted policies similar to Europe that need to be factored into our energy strategies over the next three years. Shortly after his inauguration, President Biden signed an executive order directing the secretary of the Interior Department “to pause on entering into new oil and natural gas leases on public lands and offshore waters to the extent possible” while beginning a “rigorous review” of all existing fossil fuel leases and permitting practices. President Biden also directed federal agencies to “eliminate fossil fuel subsidies as consistent with applicable law.”
In addition, regulatory hurdles hindered Natural Gas production growth in the United States. There is no greater example of the effect excessive regulations hindering production than in the Marcellus-Utica basin, which is the largest U.S. gas producing region in America. Regulatory hurdles in the Northeast have delayed or cancelled plans to build the Natural Gas pipeline infrastructure needed to transport Natural Gas to the northeast and surrounding regions.
As reported in OILPRICE.COM, one such project was the Atlantic Coast project, a pipeline from West Virginia to North Carolina along a route that had to pass through the Appalachian Trail in Virginia. In the summer of 2020, despite a major win on the right-of-way issue at the U.S. Supreme Court, the developers of the pipeline definitely scrapped the project due to ongoing delays and major cost overruns. Tragically this has resulted in the U.S. Northeast needing import Liquified Natural Gas from foreign producers to meet its gas demand.
Natural Gas prices have doubled since Nov 3rd, 2020, which also increased the cost of Electricity, But our increases pale in comparison to Europe’s 950% increase!
The present administration’s energy policies have led to decreased production and higher Natural Gas and Gasoline prices. The consequences of their policies clearly have had short-term consequences, but I am concerned the long-term consequences will be even greater.
Our present administration has shown no interest in reversing their restrictions on production including new restrictions on building liquefied-natural-gas terminals in the United States that are needed to liquefy our abundant Natural Gas to be shipped to Europe and the rest of the world. The cancellation of oil and gas pipelines, such as the Keystone XL, and limiting gas-drilling permits in Alaska, Texas, and other oil-rich states have also lowered our domestic production.
I don’t believe similar to Europe we will see 950% increases in America overnight, but I am sure in 2020 consumers in Europe didn’t dream their cost of Natural Gas and Electricity would be where it is today! As I said earlier the present administration’s commitment to green energy increases the probability the next three years will be characterized by wild swings in energy prices and securing fixed rates when prices pull back will be in your best interest.
Recent declines in Natural Gas prices were primarily based on 2 factors:
3 factors will support higher prices in the United States:
Based on the above observations, Natural Gas and Electricity prices will likely increase in the long-term, and short-term pullbacks should be considered buying opportunities. The timing of entry, and most effective term, (length of contract), for your hedge is based on a wide variety of factors, but the 2 most important are your risk tolerance, and the shape of the pricing curve in the forward markets.
As I explained in previous reports, Natural Gas prices are lower in the forward markets from 2023 through 2026; and we recommend securing longer-term agreements that include the lower prices from 2023 through 2026.
And as explained in recent reports, when appropriate our consultants will also help you secure blend and extend agreements to take advantage of an even sharper longer-term pullback if and 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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