RD Energy Newsletter: May 2020

RD Energy Newsletter: May 2020

KEY DRIVERS

  1. Worldwide Pandemic
  2. Sudden drop of global oil demand
  3. Extremely high levels of global oil in storage & oil well shut-ins
  4. Oil well associated natural gas production shut-in too
  5. US. natural gas storage levels currently 19.5% higher than the past 5 year average
  6. Rigs drilling natural gas only have dropped around 34% so far in 2020
  7. Well completion crews in some areas like the Appalachian area have dropped nearly 80% on wells only producing natural gas
  8. Electric transmission grids and utilities are seeing electric demand beginning to rebound

 

Commentary

In 2018 and 2019 wholesale energy commodity markets didn’t have a lot of volatility.  2020 is obviously going to be very different as many bullish and bearish factors are trying to push prices in both directions and creating a lot of volatility in the short-term natural gas and electric commodity markets.  The important thing to do is focus on the supply and demand economics and not get caught up in our emotions or preconceived ideas.  We know our clients are not day traders or short-term buyers, but instead are long-term consumers.  Short-term and long-term price trends can be and often are completely different. As they are right now.  It’s hard not to get caught up in the short-term frenzy and base long-term decisions on the short-term views.  We work to provide supply and demand facts that will help our clients ignore the short-term noise and focus on what affects them most; medium and long-term price trends.  By focusing on the key drivers and keeping your eyes on the long-term view, customers preferably save money off their current prices, but will also at times make decisions to reduce upside price risk and keep energy expenditures stable in the years to come.

The first fact that needs pointed out is that commodity oil prices and commodity natural gas / electric prices do not run parallel with each other.  Commodity natural gas and electric DO in large part run in close parallel with each other.  However, commodity oil prices run contrary to commodity natural gas and electric prices.  When oil was priced over $70/bbl. associated natural gas (or natural gas coming out of the well along with oil production) often sold for $2.00 – $3.50/MMBTU.  Investors were drilling for $70+ oil and not for $2.00 – $3.50/MMBTU natural gas.  We should point out that over the past decade or more the U.S. has also seen the rise of natural gas wells drilled totally absent of oil production with many deep natural gas reserves found throughout the U.S.  New drilling technology like horizontal drilling made it more economically feasible to drill for natural gas only when these large natural gas reserves were found.  Dynamic growth in natural gas production in the U.S. made the U.S. into a natural gas world player, that in turn set the stage for natural gas production in the U.S. to continue to increase.  Due mostly to the low natural gas prices the demand for U.S. natural gas increased over the past decade as natural gas replaced coal as the fuel of choice for electric generation along with the fast growth of the Liquefied Natural Gas (LNG) markets opened up sending U.S. natural gas around the globe to natural gas starved markets.  Plus, natural gas exports to Mexico has continued to stay consistent over the years.

With this underlying basic knowledge of current oil, natural gas and electric commodity markets let’s view it in terms of the economics of supply and demand.  While oil demand dropped off the cliff a few weeks ago natural gas demand did not.  Oil storage is nearly full.  Although natural gas storage levels are ahead of the 5 year average, it still is sitting around 50% full one month into the storage injection season.  We also will be seeing natural gas demand for Air Conditioning season in the Midwest and northeast picking up quickly and dramatically with the summer approaching.  At the same time, since oil storage is essentially full or soon will be, oil has to be consumed or shut-in and along with it’s associated natural gas supply.  For every one million barrels of oil shut-in approximately 2 bcf/day of natural gas is shut-in as well.  It is expected that as much as 4 million barrels of oil/day will need to be shut-in in May and June and that means as much as 8 bcf/day of natural gas will be shut-in.  At the same time the natural gas only rig count has dropped 34% along with nearly an 80% drop in the number of well completion crews has slowed natural gas production in the U.S. even more.

When looking at the supply and demand economics along with the many story lines of the demand drop of the oil industry in the U.S. we see something very important happening.  While oil demand fell off the charts natural gas demand did not.  In fact, current power burns of natural gas in the U.S. are slightly ahead of a year ago.  8 GW of new gas fired power plants came online in 2019.  LNG exports as well as exports to Mexico have been flat to last year.  Industrial demand for natural gas versus a year ago is off only slightly.  The natural gas NYMEX 12-month strip hit its bottom in early March.  Since then it’s trended up.  The 2021 natural gas NYMEX strip since early March is up over 20%.  While June natural gas NYMEX is currently trading at $1.95/MMBTU, December 2020 – March 2021 is currently trading at a much higher $3.02/MMBTU average.  This is the highest summer to winter price spread in quite a few years.

Consumers who have fixed long-term natural gas and electric rates for 3 or 4 years need to be congratulated.  Those customers who have 1 or 2 year fixed priced natural gas and electric contracts or only have 1 or 2 years remaining on their current supply contracts, should be thinking longer-term.  While we can’t do on-site visits right now, we’re happy to set up conference calls, webinars or video calls to talk, review the status of your electric and natural gas contracts and come up with a long-term pricing strategy.  We know it’s hard to overcome preconceived notions, but the fact is natural gas and electric prices are rising and have been for the past month.  Unless we experience a cool summer, an unexpected rebound of oil consumption and oil prices as well as slowing LNG global exports, the price trend up will likely continue.  Simply stated it all comes down to supply and demand.  As the natural gas supply gets shut-in while demand exceeds supply or is forecasted to exceed supply, prices for natural gas and electric will continue to rise.

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