Key Drivers

1. Ukraine War adding uncertainty and volatility
2. Higher oil prices keeping short-term natural gas prices supported
3. Higher oil prices stimulating oil and natural gas drilling
4. Warming temperatures in March as the worst of winter is behind us

Commentary

Global and domestic natural gas supplies initially dropped substantially in early 2020 due in large part to lower oil and natural gas production after COVID-19 hit.  The drop in natural gas production has never come close to recovering while natural gas demand has mostly returned to pre-COVID-19 levels. This supply and demand imbalance has resulted in a fundamental shift up in natural gas, and therefore, electric pricing.  After COVID-19 hit and shut down much of the global economy, energy prices plummeted and along with it the desire to invest in new drilling.  The appetite for energy came back much quicker than the desire for investing in new drilling in the U.S.  U.S. producers spent more dollars completing wells already drilled and not in service, paying off past drilling debt and increasing dividends to shareholders.  U.S. natural gas production grew to record high levels in 2018 and 2019 topping off at around 97 bcf/day.  In 2020 after COVID-19 struck U.S natural gas production only averaged around 91 bcf/day and in 2021 the production averaged only a little higher at 93.5 bcf/day.  The drilled but not completed natural gas well inventory in the U.S. dropped 60% in 2021 going from 7449 wells in January 2021 to just 4466 in January 2022.  When you factor in the likelihood that as many as 2500 of the 4466 wells drilled but not completed are likely dry holes, the number of wells available to complete is now very low.  In fact it’s the natural gas coming from the inventory of not completed wells drilled in previous years and completed in 2021 that helped keep production as strong as it was in 2021 and helped keep prices from rising even more than they did the second half of the year.  At the same time U.S. LNG exports have continued to grow, natural gas exports to Mexico have continued to grow and natural became the number one fuel for electric generation.It wasn’t surprising when looking at the supply and demand fundamentals domestically and globally that beginning last June the fundamental shift in natural gas prices, and therefore, electric prices first showed up with prices rising steadily and often rapidly the rest of 2021.

The war in Ukraine can’t be ignored.  While the war has pushed oil prices up in the U.S. and around the world, natural gas has been less effected, so far.   We are watching to see if it gives support to current price levels that might have otherwise dropped some with warming March temperature forecasts.  The last we heard Russian natural gas is still flowing through Ukraine to Europe.  Germany, France and Italy receive 36%, 23% and 27% respectively of their natural gas from Russia.  However, sanctions on Russia continues to increase daily and we’ve heard some global buyers of LNG from Russia are putting orders on hold.  The sanctions will likely have a ripple effect on all types of energy prices around the world.  High oil prices in the U.S is leading to a growing production appetite and higher new rig count starting up.  Natural gas coming out of all the new drilling won’t likely show up for 6 months or more, but the higher oil prices does seem to be the factor that has broken the barrier to new drilling.  However, increasing inflation, higher labor costs, higher material costs, higher interest rates and growing demand doesn’t mean prices will plummet back to pre-COVID 19 levels.  The fundamental shift in prices is real and will likely stick around for quite some time.  Price volatility will likely stay very high so it will be critically important to follow market trends and look for price dips that could either last a few weeks or a few days.  Being watchful of price trends, being nimble and able to make timely procurement decisions, and staying on top of critical data points will be key to buying at a good time.

At RD Energy we always advocate that it’s never too early to find the right energy partner to closely watch and track energy pricing to take advantage of wholesale price dips and buy at more opportune times for your next supply agreement.  It sounds like such a simple strategy, but it’s seldom done except by the largest business consumers.  Your company doesn’t have to wait and take whatever the market presents when your contract is about to expire.  Having a procurement strategy combining price trend analysis as well as programs to shave electric costs has never been more important.  RD Energy’s primary focus is educating and strategizing with our clients to keep them informed and better prepared for whatever the wholesale energy markets presents.