Energy Update | April 13th, 2020

Natural Gas Forward Markets Are Already Anticipating Higher Prices! In my March 24th Energy Update, I said evidence supporting

Natural Gas Forward Markets Are Already Anticipating Higher Prices!

In my March 24th Energy Update, I said evidence supporting much higher Natural Gas prices continues to grow. Natural Gas prices are the lowest since it began trading in 1990, and supplies are much lower than the springs of 2012 and 2016 when prices were below $2.00, and still approached $4.00 by the end of the year:



I also pointed out unlike 2012, production this year is projected to decrease, and asked; where do you think prices will be at the end of 2020?

In today’s report, I explain why the evidence for much higher prices by the end of year is becoming even more apparent with active Oil and Gas rig counts plunging and Natural Gas forward markets already discounting higher prices by the end of the year.

Oil rigs have declined over the last year, but the decline has accelerated with active rigs declining 19.2% over the last 2 weeks and 39.5% year-over-year.

How does the decline in Oil rigs impact Natural Gas production?

A byproduct of Oil rigs is the production associated Gas, and since associated Gas accounts for approximately 40% of Natural Gas production in the United States, any significant drop in active Oil rigs will result in much lower Natural Gas production.

This fact in conjunction with the fact that active Natural Gas rigs also continue to plunge with Natural Gas rigs down 49.2% year-over-year, greatly increases the probability Natural Gas production is about to fall off a cliff.

The question is, are Natural Gas’s forward markets already discounting a precipitous decline in Natural Gas production?

I believe the answer is absolutely yes!

The first chart is the nearby Natural Gas futures contract:

Even with the lowest inflation adjusted prices since 1990, the nearby contract has not made any headway since the end of February. Now let’s contrast this chart with the December contract:

The anticipated precipitous decline of Natural Gas production due to the collapse of Oil & Gas rigs has triggered a sharp rally in the December contract to $2.80 per MMBtu. The forward market is already discounting higher prices by the end of the year, and based on what happened in 2012 & 2016, I believe prices will likely approach $4.00, if not higher.

As I said in previous reports, anyone who hesitated to lock in the low rates available early in 2012 and 2016 paid dearly by the end of the year. Hopefully if you have not already locked in today’s low rates you will not make the same mistake of those who hesitated in 2012 and 2016. The upside risk is too great to justify waiting hoping for slightly lower prices.

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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