Kissler: Gas Producers Should Still Hedge on Price

Natural gas prices, which seem to have been in a deep sleep for the last two years, now look to have woken with an upside vengeance, even though supplies earlier this winter looked ample. Some of the factors causing this rise remain, at least for the time being, which begs the question: how high will natural gas prices go and is price protection hedging still as necessary as before?

Spoiler alert: it is.

What pushed natural gas prices higher

First, the unusually cold weather in much of the country increased natural gas demand during the winter. In particular, a severely cold February pushed temperatures to wind chills of below zero as far south as Texas on two different occasions. These cold temperatures froze off natural gas production in areas that normally are immune, which has attracted traders’, and especially end-users’, attention.

Then President Donald Trump enacted massive 25% across-the-board tariffs on all goods from Mexico and Canada—except for Canadian energy, including Canadian natural gas, on which he imposed a 10% tariff. He also added 10% to the existing tariffs on goods from China.

Currently, natural gas imports from Canada account from between 5% and 7% of U.S. needs and can spike to 10% seasonally, so a tariff on Canadian natural gas is not insignificant. When you factor in the fact that LNG exports from the U.S. have hit a record, it becomes clear that a $2 handle for natural gas was simply too cheap.

Low storage raises concerns for future

In mid-March, natural gas storage was 23% below the level a year prior and 11.5% below the five-year average. This low level has raised concerns that refilling U.S. and European storage could be much harder than expected if we see high temperatures show up in early summer. If we factor in an additional LNG export demand pull of 7.5 Bcf/d by year-end from new buildouts on Plaquemines 1 and 2 along with Corpus Christi 3 and Golden Pass, then one could expect a strong demand pull to continue.

The immense projected energy needs of artificial intelligence (AI) will also be a continued pull on natural gas demand as new power grids are built out over the next few years. Microsoft’s planned Stargate AI supercomputer alone may require as much as four to six gigawatts of power, almost equivalent to the power needs of a large city such as New York.

So, does this mean natural gas producers should not be diligent in price protection hedging? Absolutely not. Keep in mind that the cure for high prices is higher near-term prices, and past history shows that what goes up in energy prices (especially natural gas) brings on new production. This eventually pushes prices back down, with an even more accelerated vengeance.