Today’s Low Natural Gas Prices Are Déjà Vu, What Can We Learn From The Past?
The Mar 7th Energy Update closed with the statement, history is our guide, and we are confident there will be
The Mar 7th Energy Update closed with the statement, history is our guide, and we are confident there will be
The Mar 7th Energy Update closed with the statement, history is our guide, and we are confident there will be a time in 2023 when rates will be significantly higher than where they are today.
What was the basis of this statement?
When you observe a pattern is consistently repeated over time, and are faced with the same pattern again, hopefully you learn from the past and not make the same mistakes as you did before.
Early in 2020, Natural Gas prices declined to near today’s price level and the Jan 8th 2020 Energy Update, explained why prices were that low and most importantly why the average price would likely be much higher over the next 36 months.
This belief was supported empirically by the fact that in the previous 3 instances when prices were that low, the average price was always much higher the following 36 months. When a pattern consistently repeats itself there must be a fundamental reason why it is repeating. In that instance the fundamental reason was the cost of production of Natural Gas was higher than the present price; therefore, suppliers of Natural Gas were forced to curtail their production .
The following chart contained in the Jan 8th 2020 Energy Update was the empirical evidence supporting why early in 2020 we believed Natural Gas and Electricity rates would on average be much higher the following 36 months.
In the Jan 8th 2020 Energy Update, we said based on the empirical evidence reflected in the above chart, we recommended anyone with agreements expiring within the next 18-months not delay hoping for lower prices. The upside risk was too great to justify waiting in the hope for slightly lower prices.
Those who heeded our recommendations to hedge longer-term avoided the pain of last year’s catastrophic price increases, but those who didn’t paid much more for their Natural Gas and Electricity.
Where are we today, are we likely facing a similar scenario to 2020?
We believe we are, based on the fact that after reaching the 2020 low we now have 4 previous instances when Natural Gas declined to unsustainably low prices similar to today; and the average price in each case was much higher the following 36-months therefore, based on this empirical evidence we believe the average price will again be much higher the next 36 months:
In our Feb 20th Energy Update, we said today’s low prices are unsustainable for the simple reason Natural Gas producers are not profitable with prices this low; therefore, they will cut production to force prices higher. OilPrice.com reported “The Natural Gas price drop was already forcing producers to taper production plans just as Europe begins to plan for its summer gas storage refill season when demand is expected to surge in 2023.
An excellent Wall Street Journal article written last week titled “Why Gas Bills Are Going Crazy, With No End in Sight.” explains why supply challenges contributed to the most volatile year on record for Natural Gas. This article pointed out analysts, traders, and big gas buyers expect this kind of instability will become the norm, and Coal-fired power plants have been retired en masse without wind and solar farms ready to replace their output, pressuring utilities to pay up for Natural Gas.
Earlier we said those who heeded our 2020 recommendation to hedge longer-term avoided the pain of last year’s catastrophic price increases, but those who did not paid much more for their Natural Gas and Electricity.
Today’s report is titled “Today’s Low Natural Gas Prices Are Déjà Vu, What Can We Learn From The Past?”.
Our hope is this report helps you understand history is repeating itself and if you have an agreement expiring within the next 18 months you don’t delay hoping for lower prices. The upside risk is too great to justify waiting in the hope for slightly lower prices.
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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