Warm Summer and Potential of Major Hurricane Increasing Probability of Natural Gas Supply Deficit in 2025?

Energy News Report: 20 May 2024 Warm Summer and Potential of Major Hurricane Increasing Probability of Natural Gas Supply Deficit

Energy News Report: 20 May 2024

Warm Summer and Potential of Major Hurricane Increasing Probability of Natural Gas Supply Deficit in 2025?

Natural Gasis the largest source of power for the generation of Electricity; therefore, their pricing is highly correlated, which is why we focus on Natural Gas in our reports.

Our May 6th Energy Update explored 2 factors moving Natural Gas from supply surpluses in 2024 to supply deficits in 2025, which has resulted in Natural Gas becoming a Contango Market predicting prices will be higher from now through 2028. 

The summary of forward market prices below clearly shows Natural Gas has become a Contango Market through 2028:

A market becomes a Contango market when its forward contract prices are higher than its nearby contracts, which is where Natural Gas is today with its forward contract prices projected to average $2.95 per MMBtu the remainder of 2024, $3.55 in 2025, $3.97 in 2026, $4.04 in 2027 and $4.02 in 2028.

The first factor supporting higher prices through 2028 is Natural Gas producers are cutting production in response to today’s unsustainably low prices. Baker Hughes’s latest report, released May 17th , confirmed producers are decreasing their production with active Gas rigs down 27% from this time last year going from 141 to 103 active rigs. 

The second factor supporting Natural Gas prices through 2028 is our continued growth in Liquified Natural Gas exports overseas and pipeline growth, mainly to Mexico.

Growth of Liquified Natural Gas Exports Since 2016

 Growth of Exports to Mexico

In today’s report we will discuss a third factor that could force Natural Gas prices higher this summer:

NOAA is predicting summer temperatures will likely be higher than normal throughout most of the lower 48 states:

In addition, AccuWeather is forecasting 20-25 named storms across the Atlantic basin in 2024, including 8-12 hurricanes, four to seven major hurricanes and four to six direct U.S. impacts. This is all above the 30-year historical average of 14 named storms, seven hurricanes, three major hurricanes and four direct U.S. impacts.

A warmer than normal summer would increase the demand for Natural Gas and Electricity and a major hurricane could disrupt the production of Natural Gas, which would further deplete our supplies of Natural Gas leading to higher prices.

Although no one can predict with 100% certainty what this year’s summer will be like, most major forecasters are predicting as we transition from El Nino to La Nina conditions, the result will be warmer than normal temperatures this summer with increased hurricane activity:

And Natural Gas’s forward markets as we warned would happen in our May 6th Energy Update have responded with higher prices:

After our May 6th Energy Update, Natural Gas has rallied from $2.19 to $2.65 per MMBtu.  

But it is important that you understand if you still have not reserved a fixed rate to protect against higher prices long term it is not too late to do so. Since 2000, when Natural Gas declined to where it is today, the average price was always higher long term.

Natural Gas Deficit

We believe the three factors discussed in today’s report strongly suggests the average price will be higher long-term, and based on what has happened since 2000, we still are likely early in the present cyclical bull market, and the longer you delay securing fixed rates the more you will likely pay later!  

Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We 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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