Short-Term Factors Triggered Lower Natural Gas Prices, But Long-Term Factors Support Higher Prices – Part 2

The Feb 6th Energy Update discussed the two short-term factors triggering the recent Natural Gas price declines, and then pointed

The Feb 6th Energy Update discussed the two short-term factors triggering the recent Natural Gas price declines, and then pointed out the long-term factors supporting higher prices remained in place.

The two short-term factors were:

  1. Freeport LNG exported approximately 20% of all S. Liquefied Natural Gas prior to an explosion at their plant on June 8th, 2022. It took about 60 Bcf per month of Natural Gas to process Liquefied Natural Gas at the Freeport LNG plant. And the plant remains closed; therefore, since the explosion approximately 510 Bcf of Natural Gas remains in storage, which has led to a supply glut and lower prices.
  2. This year’s warmer than normal winter also lowered heating demand for Natural Gas, which contributed to U.S. Natural Gas supplies being above average for this time of the year.

But the three major factors that initially supported increased
Natural Gas prices the last two years remain in place:

  1. America’s move away from Fossil Fuels to Green Energy continues to be our nations policy as demonstrated by the “Inflation Reduction Act” signed into law on August 16th, 2022. This law confirmed America’s commitment to move away from fossil fuels to “clean energy”.
  1. America’s aggressive fiscal spending continues as demonstrated by the Omnibus Bill passed before Christmas. Since January 2020, the Federal budget has increased 34%, which increases the risk of inflation in the U.S for the foreseeable future.
  1. The demand for our Liquefied Natural Gas (LNG) in Europe remains very strong with their Green Energy policies resulting in prices much higher than America’s. Europe’s demand for America’s liquified Natural Gas (LNG) is expected to continue for years to come with our prices a fraction of theirs.

In addition to the above 3 factors, another factor is now in place:

Natural Gas is now at an unsustainably low-price level. As I wrote in the Feb 6th Energy Update, no one knows for sure when Freeport LNG will resume full operations, but it appears they are getting close, and when they resume operations, I believe Natural Gas prices will move sharply higher from today’s incredibly low historical price levels.

Prices this low are unsustainable for the simple reason suppliers are not profitable  with prices this low; therefore, they will cut production to force prices higher. reported last week “The Natural Gas price drop is already forcing producers to taper production plans just as Europe begins to plan for its summer gas storage refill season when demand is expected to surge.

The Jan 4th, 2022 Energy Update, reminded us that early in the 21st century, we experienced higher Natural Gas prices and volatility prior to fracking giving us sufficient supplies to meet our energy needs, but over the last 10 years we were blessed with a period of lower prices and volatility with fracking giving us sufficient supplies to meet our energy needs.

But the long-term risk factors discussed in the Jan 4th, 2022 Energy Update  increased the potential we are returning to the period of higher prices & volatility before fracking.

As I wrote in the Jan 4th, 2022 Energy Update, I believe we are entering an extended period of high volatility in which the timing of entering hedges is extremely important. When prices decline during periods of lower-than-expected demand it should be used as an opportunity to lock in a fixed rate.

Therefore, if you have not already hedged your cost of Natural Gas or Electricity, I recommend taking advantage of the recent unexpected short-term decline in Natural Gas as protection against the risk of higher Natural Gas and Electricity prices long-term. Although it is possible rates could go slightly lower short term, with history as my guide I am confident there will be a time in 2023 when rates will be significantly higher than where they are as I write this report. 

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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