By Michael DeCaluwe
October 12, 2021 — “The cure for high prices is high prices.”
I’ve heard this quote many times over the years as it relates to the energy industry. When prices increase, energy producers are incentivized to produce more supply. This additional supply typically helps cure the supply/demand imbalance, and rates inevitably fall.
Makes sense, right? The cure for high prices is…high prices.
But this year’s run up in natural gas pricing?
This time, it might be different.
If you look at the forward market for natural gas, rates are elevated over the next seven months but then come back down next summer. That means the market thinks these really high gas prices are only here for the short term.
But if you examine the reasons behind the recent run up in pricing, there are risks in believing that this bull market will end once spring begins.
The increase in gas rates has primarily been driven by supply and demand metrics. Our nation’s natural gas storage supply is six percent below our five-year average. And an energy-starved international market is siphoning off as much of our gas supply as it possibly can.
Another reason supply is low is due to the lack of investment in the energy sector. Wall Street and private investors have grown tired of the low returns generated from natural gas producers. As a result, investment money has actually flowed out of the industry.
The only way money comes back into the industry — which is vital to continuing to produce supply — is if we see higher gas rates for longer than this coming winter. Investors aren’t going to put money back into energy if returns are meager in another year.
That’s what makes the current market so problematic. Energy rates are elevated through next March, after which they lower to $.38-$.42 per therm for most months. That likely won’t be enough to entice investors.
Nothing is a guarantee at this point — after all, no one predicted the current bull market this year. This is just another risk out there for energy users and another reason energy consumers might want to “do something” and lock rates longer-term.
Maybe we correct the quote above to: “The cure for high prices is LONGER TERM high prices.”