Energy Update | January 20th 2020

Characteristic of a Major Bottom Over 40 years of trading I observed major bottoms occur when prices decline to an

Characteristic of a Major Bottom

Over 40 years of trading I observed major bottoms occur when prices decline to an unsustainably low level below the cost of production, and companies are no longer profitable. This is what is taking place today in Natural Gas with most Exploration and Production companies reporting losses over the last year, and their profit outlook is continuing to deteriorate.

As I wrote in my Jan 8th Energy Update, we have experienced warmer than normal weather since early November, and although a recent winter storm increase demand briefly, warmer than normal weather is expected to return into early February and Natural Gas prices have fallen to near a 20-year low below $2.00 per MMBtu:

As you can see in the above chart, Natural Gas prices were above $2.00 per MMBTU 98.3% of the time, and over the last 20 years, when prices dropped below $2.00 per MMBtu, they were always higher on average the following 36 months.  It should also be noted the longer prices stay low the higher they will go! This is a byproduct of weaker companies being forced out of business thereby decreasing competition, and the surviving companies are highly motivated to increase prices to make up for lost profits accrued while prices were low.

I believe we are close to a major bottom in Natural Gas, and when you can secure a rate below where it was 98.3% of the time since 2000, it is wise to do so. Although prices could go slightly lower in the near-term, it is highly likely the average price of Natural Gas will be much higher over the next 36 months!

This report focuses on Natural Gas rates, but it also pertains to Electricity. Natural Gas is the largest source of energy for the generation of Electricity; therefore, they are highly correlated, and based on the empirical evidence reflected in this report, I recommend anyone with agreements in Natural Gas and Electricity expiring within the next 18-months not delay hoping for lower prices. 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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