Natural Gas’s Rally to Seven Year High Results in Modification of Hedging Strategy
Natural Gas’s Rally to Seven Year High Results in Modification of Hedging Strategy https://youtu.be/L6pyeljyypM In my August 10th Energy Update,
Natural Gas’s Rally to Seven Year High Results in Modification of Hedging Strategy https://youtu.be/L6pyeljyypM In my August 10th Energy Update,
In my August 10th Energy Update, I asked with prices above $4.00 per MMBtu was it too late to lock in prices? I then explained why I believed it was not too late, in fact, it was more important than ever to lock in rates longer-term.
Anyone not already hedged who heeded my recommendation to take advantage of Natural Gas experiencing “Backwardation ” with forward market prices from 2022 thru 2025 trading near $3.00 per MMBtu, and locked in prices long-term avoided the consequences of the very large rally since my last report:
The timing of execution is the most important factor determining the effectiveness of hedges, In today’s report, I will explain the consequences of not heeding my reports over the last 15-months by not hedging your Gas and Electricity contracts long-term, and most importantly what I recommend you do now if you are not hedged or have Gas or Electricity contracts expiring within the next 18-months.
To help you understand where we are today, in today’s report, I will be referencing several reports written over the last 15-months, starting with my June 16th, 2020 Energy Update,
In this report, I said Natural Gas prices were consolidating at the lowest inflation-adjusted prices since it began trading in 1990. Prices this low were below the cost of production, and companies producing Natural Gas won’t generate profits; therefore, weaker companies won’t survive, and the surviving companies would be highly motivated to decrease production leading to higher prices.
The EIA was forecasting the average Natural Gas price would be 50% higher in 2021, and I said based on what happened in the past when Natural Gas declined to near present levels, the EIA estimates for 2021 may be conservative and we could experience price spikes to at least $4.00, and as you can see those who heeded my recommendation are paying much less now than where we are today.
But as I said earlier the timing of execution is the most important factor in determining the effectiveness of hedges, and my role as commodity analyst for Energy Professionals is to monitor markets and point out short-term opportunities to execute hedges. One year ago today in my Sept 14th, 2020, Energy Update, I said we had moved out of the consolidation pattern formed at the lowest inflation-adjusted prices since 1990, which I referred to as a buying zone, and pullbacks to this zone should be considered a buying opportunity for any unhedged accounts.
I said my concern was if you delayed, you would likely pay more later.
And as you can see those who took advantage of the pullback to the buy zone locked in their prices at the lowest possible price and those who didn’t, paid more later.
But those who did not lock in their Natural Gas and Electricity rates in the fall of 2020 had another opportunity to do so at the lowest possible price this spring during the spring shoulder period, which I discussed in my Apr 12th, 2021 Energy Update.
In this report, I said it was not surprising Natural Gas didn’t rally when demand was low in the spring shoulder period, but it was important to note prices were consolidating above long-term support near $2.50 per MMBtu, and was forming a pattern similar to 2001, 2012 & 2016 when early in their bull markets they formed patterns of higher highs and lows, and the average price was always higher for at least three years:
And as you can see those who took advantage of the pullback above long-term support avoided the very large rally we have been experiencing since my Apr 12th, 2021, Energy Update.
In my last Energy Update written August 10th, I said the Biden Administration similar to the Obama administration had increased fossil-fuel regulations, which inhibits production and in conjunction with the amount of spending proposed increases the risk of inflation in all areas of our economy. I said it was highly unlikely we would return to the prices experienced during the Trump administration in 2016 to 2020 when regulations were lifted and production increased to new records, and inflation was a non-factor and prices north of $6.50 per MMBtu were possible.
In this report, I said the good news was that prices in the forward markets were still experiencing backwardation in 2022 thru 2025 trading near $3.00 per MMBtu! And I said three years from now you may look back and realize there was only one cost of doing business you could have stopped increasing, your cost of energy for Natural Gas and Electricity.
As I have demonstrated in my reports over the last 15-months those who followed my recommendations and hedged their cost of Natural Gas and or Electricity long-term have secured effective hedges, but going forward I will need to modify my recommendations according to your specific situation.
After writing my August 10, Energy Update, Natural Gas prices have greatly increased and prices in 2022 are not as attractive as they were last month, but as you can see forward market prices for 2023 thru 2025 are still trading near $3.00 Per MMBtu.
Therefore, based on the shape of prices in the forward markets, anyone who has not already hedged their cost of Natural Gas or Electricity, or their hedges expire within 18-months, I recommend hedging your Gas and or Electricity accounts according to the following three scenarios:
For our clients who followed our recommendations over the last 15-months, today’s report confirms they made a wise decision based on the facts I strive to present in my reports. For those who have not or have hedges expiring within the next 18-months, my hope is the three scenarios in today’s report will help in securing your next Gas and or Electricity hedges.
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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