Energy Update

September 19th, 2018

Natural Gas Trading Within Tight Trading Range, But Beware of Complacency!  

(My reports focus on Natural Gas as it is the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)

In my August 13th Energy Update, I said this year’s extremely hot summer has resulted in very tight Natural Gas supplies, and although no one can absolutely predict the future, rates in the forward markets are lower than where they were nearly 95% of the time over the last 18 years and with supplies projected to remain 600 Bcf below the 5 Yr. Avg. until the end of August and stay far below normal as we start the winter heating season, we recommend hedgers secure rates now.

As I write this report, based on NOAA’s present weather forecasts below is an estimate of Natural Gas supplies from Sep 14th thru Oct 5th compared to the 5-Yr. Avg.:

 

Week Ending    2018   Net Change    5 Yr. Avg.    Deficit to 5 Yr. Avg.    % Below 5-Yr.

    

 Sep 14                    2719          +83                   3308                         589                               17.8%

Sep 21                     2788          +69                  3389                         601                                17.7%

Sep 28                    2879          +91                   3473                         594                                17.1%

Oct 05                    2978          +99                   3563                         585                                16.4%

 

Normally Natural Gas supplies increase from April thru October; therefore, it is very troubling supplies on Oct 5th are projected to be 585 Bcf below the 5 Yr. Avg, and we are projected to start the winter heating season in November with the lowest supplies in 10 years. But as you can see below; Natural Gas prices are close to where they were on August 13th.

Why have Natural Gas prices remained relatively stable with supplies at very low levels?

The answer is found in the belief increased Natural Gas production is sufficient to meet this winter’s heating demand. I agree if we don’t have a colder than normal winter, increased production will be sufficient, and prices should remain stable, but what happens if we have a colder than normal winter? Since much more Natural Gas is used during the winter than in the summer, and with supplies very low as we start the winter, it would likely lead to a dangerous shortfall in supplies and higher prices.

Also, it is important to note that by February or March, several LNG projects will come online and are projected to more than double LNG capacity to 9 BCF/day by the end of 2019. This would eat up much of the expected growth in production and in conjunction with a cold winter lead to much higher prices; therefore, I don’t believe it wise to be complacent and count on increased production being sufficient to handle demand this year with supplies at the lowest level in 10 years.

This is especially true when the price of Natural Gas is lower in the forward markets than where they were nearly 95% of the time over the last 18 years. The old proverb, “A Bird in the Hand is Worth Two in the Bush” is as true today as in the 16th century and hedgers will benefit by reserving rates longer-term while they are below nearby rates, and not delay hoping for lower rates in the future.

Conclusions:

Although prices have remained relatively stable with supplies at very low levels, I don’t believe it is wise to be complacent and count on increased production handling demand this year with supplies at the start of the winter heating season at the lowest level in 10 years. This is especially true when the price of Natural Gas is lower in the forward markets than where they were nearly 95% of the time over the last 18 years.

Not every client’s risk tolerance and hedging strategy are the same, but we trust the above report will help you put into perspective the risk/reward opportunities now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

 

Ray Franklin
North American Energy Advisory

Senior Commodity Analyst

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