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Risk of Higher Natural Gas Prices Increasing Short-Term and Long-Term

https://youtu.be/JWOLkiVOPJE In my Sept 14th Energy Update, I explained with Natural Gas prices sharply higher over the last few months,

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In my Sept 14th Energy Update, I explained with Natural Gas prices sharply higher over the last few months, I was modifying my recommended hedging strategies depending on when your Gas and Electricity agreements expired. In that report, I recommended those who had not already hedged their cost of Natural Gas and or Electricity, or their hedges expired within 18-months, execute hedges starting in 2023 thru 2025 with the average forward market price still near $3.00 per MMBtu.

I pointed out the risk of inflation was very high, and I believe reserving energy for Natural Gas near $3.00 per MMBtu was in your best interest. Remember the proverb ”a bird in the hand is worth two in the bush” is pertinent to ensuring budget certainty for 2023 thru 2025 when inflation will likely be a risk to your cost of doing business.

My recommendation to take advantage of the low pricing from 2023 thru 2025 still holds with pricing in this period still attractive even though since my last report, Natural Gas continued its relentless rally and is not showing any sign that the rally is near completion, in fact, it could be about to accelerate to higher price levels

In my Sept 14th Energy Update I said if you don’t have hedges expiring within the next few months, you could wait for Natural Gas to pullback from its present rally to execute hedges thru the end of 2022.

I explained that when a market increases exponentially as it is presently doing, invariably there will be an equally sharp pullback sometime in the future, but since my last report several factors have increased Natural Gas’s potential to continue increasing both short and long term. To understand why, we need to look at the fundamentals supporting the present rally, which  are always based on supply/demand factors.

Two Primary supply/demand factors supporting higher Natural Gas & Electricity prices long-term

  1. In my Feb 2nd, 2021, Energy Update, I said President Biden signed an executive order directing the secretary of the Interior Department “to pause on entering into new oil and natural gas leases on public lands and offshore waters to the extent possible” while beginning a “rigorous review” of all existing fossil fuel leases and permitting practices. President Biden also directed federal agencies to “eliminate fossil fuel subsidies as consistent with applicable law.” Clearly these actions will have and has had an adverse effect on Natural Gas production.
  2. Another factor has to be considered; green energy policies implemented in Europe over the last year resulted in their Natural Gas supplies being at a 10-year low as they enter the winter heating season. They are desperately trying to import Liquefied Natural Gas (LNG) to make up the gap, and U.S. Liquefied Natural Gas exports are hitting record levels to help them make up the deficit. The increased demand for LNG worldwide is resulting in record-high prices in Europe and could also result in higher prices in the U.S. And for me, the major long-term concern is the policies leading to this present crisis are not abating, they are becoming more entrenched here and abroad.

But near-term is the risk of higher Natural Gas prices increasing or decreasing?

Two primary factors that are increasing the risk of higher Natural Gas & Electricity prices short-term

  1. We are entering the winter heating season with very low Natural Gas supplies both here and in Europe, and if we experience a colder than normal winter analyst are warning Natural Gas prices could be above $10 per MMBtu. I am not predicting this will happen, but it is certainly a possibility.
  2. Another short-term factor is the potential for a major storm impacting production in the Gulf region. The sea temperatures of the Atlantic Basin are much warmer than normal this early October, with a strongly positive anomaly of up to 2-4 °C or even more in some areas. Including the western Atlantic, the Caribbean region, and part of the Gulf of Mexico.

After writing my Sept 14th, Energy Update, Natural Gas prices have continued to increase, but although forward market prices for 2023 thru 2025 are creeping higher their average price of $3.24 per MMBtu are still attractive from a long-term perspective:

Natural Gas Future Prices
      
Month20212022202320242025
Jan 6.054.273.693.46
Feb 5.924.233.633.39
Mar 5.523.853.413.21
Apr 4.013.232.972.82
May 3.853.152.912.79
Jun 3.883.212.982.83
Jul 3.923.272.992.88
Aug 3.943.283.012.89
Sep 3.923.272.992.88
Oct 3.963.33.032.92
Nov5.884.033.413.143.02
Dec6.014.193.623.363.24
Average5.954.433.513.173.03
      
2023/25 Average Price:      3.24
2022/25 Average Price:      3.54

Therefore, due to the long-term and short-term risks discussed in today’s report, risk-averse hedgers may consider hedging longer-term, either 48 or 60 months so you can average in the low forward market prices available from 2023 thru 2025. 

You can hedge Natural Gas from Jan 2022 thru Dec 2025 at $3.54 per MMBtu, which from a long-term perspective is attractive for those who don’t want to be exposed to potentially higher prices long-term. Also, If your present agreements don’t expire immediately, your hedge will have a later start date, and  your average price will be lower than $3.54 per MMBtu.

No one knows for sure where Natural Gas and Electricity prices will be over the next 6-months, but I firmly believe as stated in my most recent reports, three years from now you may look back and realize there was only one cost of doing business you could have stopped increasing, 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.

Written by
Ray Franklin
Energy Professionals
Senior Commodity Analyst

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