Low Natural Gas Supplies Supporting Prices, But Prices Still Attractive Long-Term

(My reports focus on Natural Gas as it is the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)

In my June 12^th Energy Update, I discussed the progress of rebuilding supplies, and said persistent warm weather continued to delay the building of supplies and explained how it could affect Natural Gas and Electricity prices. Unfortunately, NOAA is forecasting warmer than normal weather will continue into July, and Natural Gas supplies will remain far below where they need to be for this time of the year.

Based on NOAA’s weather forecast, by mid-July Natural Gas supplies are estimated to remain more than 500 Bcf below the 5-Yr. Avg, and it is now a virtual certainty we will start the winter heating season with below average supplies, which increases the risk of higher prices. And if we experience a colder than normal winter Natural Gas and Electricity prices are positioned to increase substantially.

 
The good news is due to a market phenomenon called “Backwardation,” hedgers can still secure rates below present levels in the forward market. Backwardation occurs when nearby contracts sell at a higher price than contracts further out.

Below is a summary of the present backwardation in Natural Gas:

Present – $2.92 per MMbtu
Apr 2019 – $2.65 per MMbtu
Apr 2020 – $2.55 per MMbtu
Apr 2021 – $2.51 per MMbtu

The price of Natural Gas is lower in the forward markets, and astute hedgers understand the old proverb, “A Bird in the Hand is Worth Two in the Bush” is as true today as in the 16^th century and will benefit by reserving rates longer-term while they are below nearby rates, and not delay hoping for lower rates in the future.

This is especially true today when over the last 18 years rates were higher nearly 95% of the time over where they are presently in the forward market:

Conclusions:

No one can absolutely predict the future, but with rates in the forward markets lower than where they were nearly 95% of the time over the last 18 years, and with supplies far below the 5 Yr. Avg., it would be wise for hedgers to secure rates now.

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
North American Energy Advisory
Senior Commodity Analyst