NYMEX May natural gas contract.
NYMEX May natural gas contract

There is a notion that we are in a “lower for longer” natural gas price scenario. We certainly believe that is true.

Natural gas production numbers continue to rise year over year. Shale oil plays continue to require that associated gas be moved or flared to be able to produce oil at a lucrative price north of $55 per barrel.

We have even seen negative absolute prices in the Permian basin in early April. Appalachian producers continue to increase production and drilling.

Bear Market Making Customers Wondering if They Should Hold Out for Lower Prices

Each of the above factors contributes to a rosy supply picture for energy consumers of both gas and electricity as natural gas remains the marginal generation fuel for virtually all hours of the year.

So, the consumer might just be asking, “What makes me want to buy into this market now when these factors are only likely to drive prices lower?”

We don’t believe that in aggregate every consumer should load up the entire boat at these prices. However, we do believe that there are some upside risks to this current gas market.

Three Upside Risks to Watch Out For

First, there will be a doubling of liquified natural gas takeaway capacity in the Gulf coming on line this year. This will provide a home for an additional 5 BCF a day of natural gas.

Second, the old adages that the cure for low prices is low prices. What this means is that if we get below a certain level in pricing for natural gas, we will have drilling companies cut capital budgets and drill fewer wells. Do we know where this price is?

As a practical matter, we do. It has hovered around $2.50 per MMBtu for a long time. And, with May trading at less than $2.60 this month, we are getting close.

Finally, it is important to realize that gas is a regional commodity and that while there are very low prices in the Permian Basin right now, that is a result of insufficient takeaway capacity and nothing else.

So what should the retail gas and electricity consumer do at these low prices?

Our recommendation is a measured approach to remove some of the upside risk from the gas and electricity budget. At this time it is very unlikely that prices go much lower. However, there are some bullish factors which may rear their ugly heads in the next few months.

Author:
As Vice President, Operations at Reliable Power Alternatives Corporation, Mark is responsible for the leadership and management of the RPAC analyst team, as well as the development and execution of all procurement strategies. Mr. Kleinginna has innovated in wholesale and retail energy markets throughout the United States and Canada for the last 25 years.

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