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Winter Update – Natural Gas Prices Decline Due to Freeport LNG’s Delayed Reopening and Mild Weather in Late December

In today’s Energy Alert I will review Natural Gas rates from Jan 2021 through Dec 2022, and discuss the 2023

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  • In today’s Energy Alert I will review Natural Gas rates from Jan 2021 through Dec 2022, and discuss the 2023 outlook, short and long-term.
  • In 2021, Natural Gas increased 43% rallying from $2.58 to $3.68 per MMBtu as we began trading in 2022.

Natural Gas’s rally initially started in April 2021 and moved sharply higher into the fall before milder than normal weather short circuited the rally. But as we entered 2022, we faced the prospect of increased volatility due to rising competition for our Natural Gas supplies from buyers overseas, and probability of higher prices based on the following empirical evidence.

The Jan 4th, 2021 Energy Update pointed out over the last 20 years, Natural Gas has only been below $2.50 per MMBtu 3 times, in 2001, 2012 and 2016, and it always preceded extended periods of higher prices. Weather factors influence the direction of energy prices, but based on Natural Gas’s historical pricing over the last 20 years, the downside reward potential of lower prices short-term was minimal versus the upside risk of higher prices long-term.

The following 20-year chart of Natural Gas was the empirical evidence referred to in the Jan 4th, 2021, Energy Update clearly showing when Natural Gas traded below $2.50 per MMBtu, prices were always higher for extended periods of time:

Clients who responded to the empirical evidence provided in the Jan 4th, 2021, Energy Update avoided Natural Gas’s 43% increase in 2021 and corresponding increase in Electricity rates.

  • In 2022, Natural Gas increased 15% rallying from $3.68 to $4.22 per MMBtu as we begin trading in 2023.

In my Jan 4th, 2022, Energy Update, I pointed out that since the beginning of 2021, I had warned energy prices were increasing primarily due to America’s restrictive energy policies, aggressive fiscal spending, and quantitative easing by the Fed, and those factors collectively increased the risk of inflation in America.

The Jan 4th, 2022, Energy Update also pointed out early in the 21st century, we experienced higher Natural Gas prices and volatility prior to fracking giving us sufficient supplies to meet our energy needs, but over the last 10 years we were blessed with a period of lower prices and volatility with fracking giving us sufficient supplies to meet our energy needs.

But as shown in the graph contained in the Jan 4th, 2022, Energy Update, the long-term risk factors discussed earlier increased the potential we will return to the prior period of higher prices & volatility before fracking:

In my Jan 4th, 2022, Energy Update, I said I believed we were entering an extended period of high volatility in which the timing of entering hedges would be extremely important. When prices declined during periods of lower-than-expected demand it should be used as an opportunity to lock in a fixed rate. Clients who did so avoided Natural Gas’s 15% increase in 2022 and corresponding increase in Electricity rates.

  • The 2023 Winter Update explains why I believe we will likely follow a similar scenario this year and why it is in your best interest to take advantage of Natural Gas and Electricity’s recent declines due to lower-than-expected demand to hedge your energy costs.

Short-Term Outlook

In my Dec 12th, 2022, Energy Update, I said Natural Gas declined when Freeport LNG moved their forecast for resuming operations to year end, pending regulatory approval, and their restart must be approved by U.S. safety regulator Pipeline and Hazardous Materials Safety Administration (PHMSA), I am concerned the PHMSA has not yet signed off on a complete repair plan, and further delays are certainly possible.

The day I released the Dec 12th, 2022, Energy Update, the Federal Energy Regulatory Commission (FERC) sent a detailed list to Freeport LNG seeking additional information or documents for 64 items. FERC’s notification said any restart authorization “will only be granted following the review of filed responses … and documentation that acceptable measures have been put into place to safely return the facilities to operation.”

FERC’s most recent notification makes it clear there will be no restart authorization given until FERC has reviewed Freeport’s responses to 64 items and proves that it has put into place “acceptable measures” to safely restart the facility. FERC’s notification in conjunction with NOAA’s Forecast of very mild weather throughout the United States after Christmas:

Resulted in Natural Gas declining into the end of December:

But even after the recent sharp decline Natural Gas was still up 15% as we entered 2023, and the question for us to consider is the recent sharp decline an excellent hedging opportunity or should we wait for potentially lower prices later on. I will address this question in my Long-Term Outlook.

Long-Term Outlook

 The warmer than normal weather throughout the United States and FERC’s Dec 12th notification to Freeport LNG has resulted in Natural Gas declining towards long-term support:

But the three major factors leading to increased energy costs over the last two years remain firmly in place:

  1. America’s move away from Fossil Fuels to Green Energy remains our nations policy as demonstrated by the “Inflation Reduction Act”, which was signed into law on August 16th, 2022.
  1. America’s aggressive fiscal spending is continuing with the Omnibus Bill passed just before Christmas. Since January 2020, the Federal budget has increased 34%, which clearly increases the risk of inflation in the U.S for the foreseeable future.
  1. The demand for our Liquefied Natural Gas (LNG) in Europe remains very strong with their Green Energy policies resulting in prices much higher than America’s.

The recent sharp decline was primarily caused by two short-term factors; FERC’s detailed list sent to Freeport LNG on Dec 12th seeking additional information for 64 items, and the milder than normal weather in the U.S. since Christmas. When FERC’s conditions for reopening Freeport LNG are completed, America’s LNG exports will return to near record levels and when cold winter weather returns in the U.S., the recent sharp decline may be reversed with an equally sharp rally.   

Therefore, if you have not already hedged your cost of Natural Gas or Electricity, I recommend taking advantage of the unexpected recent short-term decline in Natural Gas as protection against the risk of higher Natural Gas and Electricity prices in the long-term. Although it is possible rates could go lower in the short-term, I believe there will be a time in 2023 when rates will be significantly higher than where they are as I write this report. 

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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