Further Evidence History is Repeating Itself and Natural Gas is Heading Higher From Its Spring Low

https://youtu.be/pOv1N2b_dZc The May 10th Energy Update pointed out In their latest Short Term Energy Outlook the EIA has forecasted Natural

The May 10th Energy Update pointed out In their latest Short Term Energy Outlook the EIA has forecasted Natural Gas will average $3.49 per MMBtu in the fourth quarter, which would be an 54% increase above the previous day close of $2.27 per MMBtu, and the average price for 2024 would be $3.72 per MMBtu, a 64% increase above the previous day close.

Natural Gas market update 10 May 2023

The EIA believes the average price of Natural Gas and Electricity will be higher in the fourth quarter of 2023 and throughout 2024.

What led the EIA to this conclusion?

In our April 17th 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:

Why were prices that low unsustainable?

They were unsustainable because they were below the cost of production, and companies were no longer profitable near those low prices; therefore, the. weaker companies did not survive, and those who did survive were highly motivated to decrease production so they could recoup lost revenue by raising prices.

Is there any indication Energy & Exploration companies are starting to decrease production that will lead to higher prices? 

The May 12th Baker Hughes weekly rig count reported energy companies reduced the number of Gas drilling rigs from 157 to 141 rigs, which would be the largest reduction since February 2016. The Gas rig count is an early indicator of future output, and this report confirms Energy companies are decreasing production.

The recent decline in Gas rigs was the largest since February 2016, the question is how has Natural Gas responded to the sharp decline in Gas rig drilling in 2016?

In 2016, after the sharp decline in Gas drilling rigs, Natural Gas reached its Spring Shoulder low the following month and the price of Natural Gas moved higher into the fourth quarter with no significant pullbacks.

How has Natural Gas responded this year after the EIA’s May 9th Short-Term Energy Outlook forecasted much higher prices by the fourth quarter and the Baker Hughes May 12th rig count showing a sharp decline of Gas rigs?

Based on this empirical evidence and the fact that in 2012, 2016 and 2020 when Natural Gas  prices in the spring were as low as they were this spring their prices were always much higher by the fourth quarter, it is highly likely prices this year will also be higher by the fourth quarter.

Why are electric rates skyrocketing in Ohio?

Hopefully the above empirical evidence helps you understand history is repeating itself and Natural Gas and Electricity prices will likely be heading higher into the end of this year and throughout 2024 from present levels.

Therefore, if you have an agreement expiring within the next 18 months, we recommend you don’t delay hoping for lower prices. The upside risk is too great to justify waiting in the hope for slightly lower prices.   

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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