Energy News Update: After Reaching Spring Low, Natural Gas Forming Pattern of Higher Highs and Higher Lows
Energy News Update: July 31st, 2023 After Reaching Spring Low, Natural Gas Forming Pattern of Higher Highs and Higher Lows
Energy News Update: July 31st, 2023 After Reaching Spring Low, Natural Gas Forming Pattern of Higher Highs and Higher Lows
Energy News Update: July 31st, 2023
In our June 13th Energy Update we pointed out Natural Gas tends to be lower in the Spring and Fall between the Winter Heating and Summer Cooling seasons, and this pattern is especially accurate when the Spring or Fall lows occur near historically low prices. For example, since 2000, Natural Gas has declined to near today’s unsustainably low prices 4 times; and in each case the final lows were attained either in the Spring or Fall:
If you look closely at the above chart, you will note the last 3 times Natural Gas prices were as low as they were this year, the final low was reached in the Spring and Natural Gas was always much higher by the Fourth Quarter.
As discussed in previous reports Natural Gas did not remain at prices as low as they were this Spring because they were below the cost of production, and Natural Gas exploration and production companies were no longer profitable near those low prices; therefore, they were highly motivated to decrease production leading to higher prices so they could recoup lost revenue.
And this is precisely what is presently taking place with Baker Hughes reporting active Gas rigs are 18.4% below where they were this time last year.
How has Natural Gas responded to Exploration and Production Companies decreasing production?
After reaching its Spring Low Natural Gas has formed a series of higher highs and higher lows, which is a classic pattern early in Bull Markets. When traders believe a major low has formed, they consider pullbacks an opportunity to add to their possessions thereby forming a series of higher lows. And this is precisely what happened in 2012, 2016 and 2020 when Natural Gas was as low as it was this Spring:
Past performance does not guarantee future results, but factors supporting higher Natural Gas prices in 2012, 2016 and 2020 are in place today. There are times when prices must go higher simply because producers cannot continue to produce below the cost of production.
With that being said, there is one caveat. As I said earlier, since 2000, when Natural Gas was as low as it was this year, the final low was always attained in either the Spring or Fall; therefore, it is possible as in the fall of 2001 Natural Gas could retest the Spring low in the Fall this year,
But it is important to note Natural Gas prices in 2002 experienced an explosive rally and those who secured their hedges a few months prior to the Fall low still paid much less than where fixed rates were 2002 through 2005. No one knows for sure whether Natural Gas will attain its final low in the Spring or Fall this year, but the empirical evidence continues to strongly support the probability Natural Gas and Electricity will be heading higher into the end of this year and throughout 2024.
Therefore, if you have agreements expiring within the next 18 months, we recommend you don’t delay hoping for lower prices and reserve power to be available when your present agreement expires. Our concern is the longer you delay now, the more you may pay later.
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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