Geopolitical Tensions Increase Potential For Higher Energy Prices
Energy Update October 30th, 2023 Geopolitical Tensions Increase Potential For Higher Energy Prices https://youtu.be/G9h7Wt51l_E 6-Months ago, in our Apr 10th
Energy Update October 30th, 2023 Geopolitical Tensions Increase Potential For Higher Energy Prices https://youtu.be/G9h7Wt51l_E 6-Months ago, in our Apr 10th
Energy Update October 30th, 2023
6-Months ago, in our Apr 10th Energy Update we warned Natural Gas would likely be heading higher based on the fact that since 2000 rates have been above where it was on April 10th, 96% of the time; therefore, it was not surprising Natural Gas is now 68% higher than where it was on Apr 10th, and most important Natural Gas is now above the 200-Day moving average.
This long-term moving average is closely followed by traders as the likely long-term trend and will likely be major support on any pullbacks.
After reading the Apr 10th Energy Update those who heeded our warning that rates were likely moving higher and secured a fixed rate nailed the lowest rates of the year. But with that being said, please don’t despair that you may have missed a major opportunity. From a long-term perspective, this cycle of higher Natural Gas prices is likely still in its early stages with higher prices still ahead:
Since 2000, when Natural Gas declined to where it is in 2023, the average price was always much higher longer-term, which you can clearly see in the above chart. In the 4 previous blocks of pricing the average price was always much higher at least 36 months.
The question is why does this pattern always repeat itself and from a long-term perspective why is the present cycle of higher Natural Gas prices likely still in its early stages?
The answer is found by understanding the following supply/demand factors:
1. As we pointed out in our July 5th Energy Update, Natural Gas’ has declined to near today’s unsustainably low prices 4 times, and in each case, the average price was always higher for extended periods of time. Prices this low were unsustainable 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.
2. In their last report, Baker Hughes announced Gas rigs are 25% below where they were this time last year, and this indicates Natural Gas Exploration and Production companies are decreasing new production, slowing the growth of our supplies, which will support higher prices longer-term.
3. While new production is decreasing, the demand for America’s Liquified Natural Gas (LNG) is dramatically increasing. Europe’s green energy policies have resulted in a shortfall of Natural Gas, and they need to increase importing (LNG) to meet their energy needs. In their most recent Short Term Energy Outlook (STEO), the Energy Information Administration (EIA) estimates the United States will export a record amount of LNG in 2023, up 9.7% from 2022, and in 2024, the EIA projects LNG exports will continue increasing and we will export a new record amount of LNG up an additional 13.2% in 2024.
4. And while the previous three factors are important, we have additional geopolitical concerns that could adversely impact energy prices throughout the world. The potential for the Israel-Palestine conflict to escalate into a regional war appears to be increasing day by day.
5. The Strait of Hormuz is a narrow waterway connecting the Persian Gulf and the Gulf of Oman, and it is the only passage from the oil-rich gulf to the Indian Ocean for maritime traffic. The Strait is among the world’s most important oil chokepoints with Oil tankers carrying about 25 percent of the world’s total consumption, and any disruption in free passage could result in skyrocketing Crude Oil prices.
6. Also, in Europe (LNG) spot prices have increased by more than 40% since the Israel-Palestine war began on October 7th, and if the conflict escalates into a regional war, Natural Gas and Crude Oil will become precious commodities likely resulting in much higher prices for both.
The bottom line is the empirical observation that since 2000, the 4 previous times Natural Gas declined towards today’s unsustainably low prices; the final lows always occurred either in the Spring or Fall, and the average price was always much higher at least 3 years should have been enough evidence for anyone with an agreement expiring in the next 18 months to not delay hoping for lower prices and reserve power to be available when their present agreements expire:
But for those who did not heed our warning over the last 6 months that prices were heading higher long-term, hopefully, today’s report highlighting geopolitical tensions helps you understand why protecting yourself against the risk of much higher rates is more urgent than ever if you have an agreement expiring in the next 18 months.
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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