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Is Natural Gas’s Recent Decline a Buying Opportunity?

Is Natural Gas’s Recent Decline a Buying Opportunity? https://youtu.be/ykExnKEgLyo In my February 15th Energy Update, I said over the last

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Is Natural Gas’s Recent Decline a Buying Opportunity?

In my February 15th Energy Update, I said over the last twenty years, Natural Gas was only this low three times, 2001, 2012 and 2016, and in each instance early in their bull markets they formed similar patterns of higher highs and lows, and the average price was always higher for at least three years. Although milder than expected weather over the last month resulted in Natural Gas pulling back from recent highs, the historical long-term patterns of previous bull markets have not changed:

natural gas price

Last month, based on this historical evidence, I said it was in your best interest to secure fixed Natural Gas and Electricity rates at that time, the downside reward potential of lower prices short-term were minimal versus the upside risk of higher prices long-term.

In today’s report, I explain why I believe the recent pullback in Natural Gas is again a buying opportunity.

It is not unusual for a market to periodically decline during a bull market, and if the long-term historical pattern shown in the above chart holds, the average price of Natural Gas will be higher the next three years. The question is are prices in the forward markets attractive versus where prices are projected to average over the next few years?

Last week, the EIA released their latest Short Term Energy Outlook (STEO), and they estimated Henry Hub spot prices will average $3.14 per MMBtu in 2021, and continued growth in liquefied Natural Gas (LNG) exports, along with relatively flat production, will contribute to Henry Hub spot prices rising to an average of $3.16 per MMBtu in 2022.

In my January 25th Energy Update, I said Natural Gas was experiencing a market phenomenon called “Backwardation”; therefore, hedgers could secure rates below the EIA’s forecasted prices for 2021 and 2022. I explained Backwardation occurred when nearby contracts sell at a higher price than contracts further out, and the recent pullback in Natural Gas is again offering hedgers an opportunity to secure rates below the EIA’s forecasted rates for 2021, 2022 and below where they will likely average long-term. 

Natural Gas Average Forward Market MMBtu Price:

2021   –   $2.71

2022   –   $2.62

2023   –   $2.54

2024   –   $2.56

In the forward market, the price of Natural Gas is much lower than the EIA’s forecasted rates for 2021 & 2022, and based on what has happened in the last twenty years when prices were as low as they are presently, the above prices are below where they likely will be for at least three years.

  • At the present time, the EIA is forecasting the average price in 2021 & 2022 will be: ($3.14 + $3.16) / 2 = $3.15 per MMBtu.
  • At the present time, the average price of Natural Gas in the forward market in 2021 & 2022 is: ($2.71 + $2.62) / 2 = $2.67 per MMBtu.
  • Hedgers can secure rates 15% below the EIA forecasted rate of $3.15 per MMBtu over the next two years. And due to backwardation risk averse hedgers can secure rates longer-term: ($2.71 + $2.62 + $2.54 + $2.56) / 4 = $2.61 per MMBtu, which would be 17% below the EIA’s forecasted rate of $3.15 per MMBtu over the next two years.

Conclusions:

My objective as Senior Commodity Analyst of Energy Professionals is to provide timely empirical data to help develop your energy strategies. The timing of execution is the most important factor determining the effectiveness of an energy contract; and I trust today’s report helps you appreciate why I believe it is in your best interest to secure fixed Natural Gas and Electricity rates at this time. The downside reward potential of lower prices short-term is minimal versus the upside risk of higher prices long-term.

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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