After Reaching Lowest Prices in 2 ½ Years Natural Gas Rallies, And We Are Entering a Period of High Volatility

The Feb 20th Energy Update warned that Natural Gas prices this low are unsustainable for the simple reason suppliers are

The Feb 20th Energy Update warned that Natural Gas prices this low are unsustainable for the simple reason suppliers are not profitable with prices this low; therefore, they will cut production to force prices higher. reported last week “The Natural Gas price drop is 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.

After writing the Feb 20th Energy Update, Natural Gas surged 43%:

The surge was precipitated by 2 factors:

1. The Feb 6th Energy Update stated no one knows for sure when Freeport LNG will resume full operations, but it appears they are getting close, and when they resume operations, I believe Natural Gas prices will move sharply higher from today’s incredibly low historical price levels.

Last week, it was reported that Freeport LNG appeared on track to use 1.2 Bcf/d of Natural Gas from pipelines, a sign it had likely started the second of three liquefaction trains at the plant. When all three liquefaction trains are fully operational, they consume approximately 2 Bcf/d of Natural Gas to produce Liquified Natural Gas for export, and they are indicating the plant could be fully operational over the next several weeks; therefore, last week’s surge in Natural Gas prices was the expected response from today’s incredibly low prices.

2. Weather factors also impact the price of Natural Gas, and NOAA is forecasting colder than normal weather throughout the United States over the next week:

NOAA 8 to 14 - Mar 2

The two factors of colder than normal weather throughout the United States the next week and Freeport LNG becoming fully operational in the next few weeks support higher Natural Gas prices short and long term.

The Feb 20th Energy Update pointed out during the 21st Century whenever we were near present price levels the cost of Natural Gas and Electricity was always higher for extended periods of time.

The Feb 20th Energy Update also pointed out the 2 reasons why Natural Gas declined, but that the three major factors that initially supported increased Natural Gas and Electricity prices the last two years remain in place.

We believe similar to 2001 to 2011, we are entering an extended period of high volatility in which the timing of entering hedges is extremely important. When prices decline during periods of lower-than-expected demand it should be used as an opportunity to lock in a fixed rate.

Our concern is after the last report, Natural Gas which is highly correlated to the cost of Electricity has begun to move higher. Therefore, if you have not already hedged your cost of Natural Gas or Electricity, we recommend securing hedges as protection against the risk of higher Natural Gas and Electricity prices long term. 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.

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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