Natural Gas Supplies Plunging Below 5-Year Average and Potential of Conflict Overseas Increasing the Risk of Higher Natural Gas Prices?–LgU In my Jan 18th Energy Update, I explained the path of least resistance appeared to favor higher prices, but

In my Jan 18th Energy Update, I explained the path of least resistance appeared to favor higher prices, but where prices went near-term would be influenced by the weather thru the end of March. If it was colder than normal Natural Gas was poised to move sharply higher, and the long-term risk had increased due to our present administration’s restrictive energy policies, aggressive fiscal spending, and quantitative easing by the Fed, and those factors collectively had increased the risk of inflation in the U.S.

Since my last report, Natural Gas briefly pulled back to the consolidation pattern discussed in my Jan 4th Energy Update before again moving higher:  

In today’s report, I will discuss 2 factors supporting the recent price increase in Natural Gas and why those 2 factors increase the risk prices will continue higher near-term.  

1) Natural Gas supplies are forecasted to plunge approximately 16% below the 5-year average in the next 4 weeks.

December was the second warmest December on record and tight Natural Gas supplies, which were 7% below the 5-year average in September, by the end of December were a comfortable 3% above the 5-year average. This unexpected increase in supplies was the primary reason Natural Gas prices declined sharply in December.

But the situation changed in January with the return of cold weather, Natural Gas supplies declined and last week the EIA reported supplies were now 1% below the 5-year average, which at first glance may seem insignificant.

But based on present weather forecasts over the next 4 weeks, what is troubling is the trend of increased demand for Natural Gas here and abroad is expected to result in our Natural Gas supplies plunging 16% below the 5-year average. If these projections hold along with the second factor, I will be discussing next, the risk of higher Natural Gas prices will certainly increase near-term.

2) Russian troops massing at the Ukrainian border

If Russia invades Ukraine any possibility the Nord Stream 2 pipeline will be approved by Germany near term would evaporate thereby exacerbating the severe energy crisis in Europe. Europe’s Natural Gas storage this year dropped to its lowest seasonal levels in more than ten years, which sent their Gas and Power prices soaring.

In response, the amount of Liquefied Natural Gas (LNG) exported from the US to Europe set a monthly record in January, reaching the highest amount for this month since records began in 2011. And plans are already in motion to further increase our LNG exports to Europe if Russia invades Ukraine.

Therefore, with Natural Gas supplies already projected 16% below the 5-year average within the next 4 weeks, what do believe would happen to Natural Gas prices if Russia invaded Ukraine and we draw down our supplies at a more rapid pace to increase LNG exports to Europe?

If you believe as I do, Natural Gas prices would likely increase, then if you have not already hedged your cost of Natural Gas and Electricity, it would be wise to consider doing so at this time.

As I explained In my Dec 6th, 2021, Energy Update, 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 enough supplies to meet our energy needs.

But we are entering a period filled with great uncertainly that will likely result in wild swings in energy prices. No one knows for sure where Natural Gas and Electricity prices will be over the next 6-months, but four years from now, I believe you will realize there was only one cost of doing business you could have kept stable and avoided increased prices and volatility, your cost of energy for Natural Gas and Electricity.

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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