Two Factors Support Securing Fixed Natural Gas & Electricity Rates
Here are Two Factors that Support Fixed Natural Gas & Electricity Rates https://youtu.be/aEk-UMfqhpM In my April 12th Energy Update, I
Here are Two Factors that Support Fixed Natural Gas & Electricity Rates https://youtu.be/aEk-UMfqhpM In my April 12th Energy Update, I
In my April 12th Energy Update, I said it was not surprising low demand during the spring caused Natural Gas prices to decline, but it was important to note prices were consolidating above long-term support near $2.50 per MMBtu, and 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.
Therefore, after my last report, it was not surprising Natural Gas’s spring shoulder low held above its prior higher low and is now moving higher off long-term support near $2.50 per MMBtu:
And from a long-term perspective, Natural Gas continues to form 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 higher at least three years.
In my last report, I also said the Energy Information Administration (EIA) predicted exports of Liquefied Natural Gas (LNG) would increase in 2021 and demand would certainly increase this summer; therefore, they believe
Natural Gas will be higher the second half of 2021, 2022 and on average the next three years.
In today’s report I will focus on 2 points supporting why I believe it is in your best interest to secure fixed Natural Gas and Electricity rates at this time:
The forward market of Natural Gas is presently in backwardation, which means contracts in 2022, 2023, 2024 and 2025 are lower than in 2021.
Average Prices of Natural Gas for the next 5 years are:
2021 — 3.02
2022 — 2.74
2023 — 2.59
2024 — 2.58
2025 — 2.59
Therefore, since prices long-term are lower than nearby contracts, it is wise to secure rates long-term, especially when you consider the empirical evidence that in 2001, 2012 & 2016 the average price was always higher at least three years when prices were as low as they were the past year. But another factor might be more important supporting securing rates long-term!
In response to the corona pandemic our government increased deficit spending at an unprecedented rate, and the FED has aggressively implemented quantitative easing, which is flooding the monetary system with cash. Clearly these policies increase the risk of inflation and the bond market is signaling inflation is on the horizon.
Long-term bonds decline when inflation rises because future payments from bonds won’t buy as much. When traders believe the cost of goods and services will be higher than it is today, bonds are less desirable, and their prices fall, which is what we have seen happening to long-term bonds over the last year.
I believe 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 nature gas and electricity. Therefore, I believe it is in your best interest to secure fixed Natural Gas and Electricity rates at this time. Although weather factors will impact Natural Gas prices, I believe, 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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