Are We Early In Cyclical Natural Gas Bull Market?

Energy News: June 24th, 2024 Are We Early In Cyclical Natural Gas Bull Market? Natural Gasis the largest source

Energy News: June 24th, 2024

Are We Early In Cyclical Natural Gas Bull Market?

Natural Gasis the largest source of power for the generation of Electricity; therefore, their pricing is highly correlated, which is why we focus on Natural Gas in our reports.

Our May 20th Energy Update explored the 3 factors that strongly suggest the average price of natural Gas and Electricity will be higher long-term, and based on what happened since 2000, we are likely early in the present cyclical bull market:

Nat Gas - Since 2000

As you can see from the above chart, since 2000, when Natural Gas trended higher 2 to 4 years, they were classified as cyclical bull markets, and they were always triggered by unsustainably low prices.  

Prices were unsustainably low when they decline below the cost of production, and producers responded by making strategic decisions to curtail production to support higher prices, which we fully explained in our Feb 26th Energy Update after prices dropped to historically unsustainably low levels this year.

The Baker Hughes most recent report released June 21st, continues to confirm producers are decreasing their production with active Gas rigs down 25% from this time last year going from 130 to 98 active rigs. Producers decreasing production was an important factor influencing the length of cyclical bull markets starting in 2001, 2012, 2016 & 2020. 

In the past, the initial response of America’s producers responding to low prices by decreasing active rigs and increasing active rigs when prices increased was an important factor determining the length of a cyclical bull market. 

And although producers responses to high and low prices is still an important factor determining the length of cyclical bull markets, in our May 6th Energy Update, we introduced a second factor that potentially will extend the length of our present cyclical bull market.

Increased exports of Liquified Natural Gas (LNG):

And increased Natural Gas pipeline exports to Mexico will likely force Natural Gas into supply deficits in 2025 and beyond!

To put into perspective how much increased LNG exports overseas and pipeline exports to Mexico will impact our Natural Gas supplies, in our May 6th Energy Update we pointed out the Energy Information Administrations (EIA) Short Term Energy Outlook (STEO) forecasted net exports would increase from 13.6 Bcf/d in 2024 to 16.4 Bcf/d in 2025.

If the EIA’s forecast is correct the net result would be our net exports would increase more than 1,000 Bcf/d in 2025, and our present 560 Bcf supply surplus would become a supply deficit in 2025 and support higher Natural Gas prices longer term.

In our May 20th Energy Update, we also pointed out another factor that could impact Natural Gas and Electricity prices shorter-term. NOAA is predicting summer temperatures will likely be higher than normal throughout most of the lower 48 states, and AccuWeather is forecasting a very active summer storm season.

A warmer than normal summer would increase the demand for Natural Gas and Electricity and a major hurricane could disrupt the production of Natural Gas, which would further deplete our supplies of Natural Gas leading to higher prices shorter term.

Although no one can predict with 100% certainty what this year’s summer will be like, most major forecasters are predicting as we transition from El Nino to La Nina conditions, the result will be warmer than normal temperatures this summer with increased hurricane activity:

And Natural Gas’s forward markets as we warned in our May 6th Energy Update would likely happen responded with higher prices while maintaining a pattern of higher highs and higher lows:

This is a classic pattern early in bull market cycles, and given NOAA’s most resent forecast through July 4th prices will likely move higher from present levels:

Therefore, based on what has happened since 2000, along with the 3 factors discussed in today’s report, we are likely early in the present cyclical bull market, and the longer you delay securing fixed rates the more you will likely pay later!  

Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We 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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