oil rigs

Energy Procurement Update

The robust recovery in crude oil and natural gas appears to be running out of steam.

New signs that members of OPEC are starting to throw sand in the sand box appeared last week as Iran failed to attend a scheduled meeting to focus on output reduction resulting in Saudi Arabia, the 900 lb. Gorilla stating that it will not limit output without an unanimous production agreement. Crude oil has breached the $40 level to the down side from its recent high of $42.50. With that being said, I do not envision a scenario that would result in a retest of the lows.

As we enter into the injection season, some colder than average weather in late March early April has not provided enough support for the NYMEX to hold above $2. The natural gas market will continue to react to the tug of war between measurably lower production and record inventory levels. Upcoming inventory reports should provide some evidence of which side has the upper hand. In addition to production and inventory, the weather experts are calling for a hotter than normal summer leaving me to believe the path of least resistance is still up. The risk to the downside is if we max out on storage which could result in an all-out price collapse which I believe will be short lived. But the risk is real and cannot be ignored.

How should this impact procurement strategy? I continue to rely on an important lesson that I learned in my trading career: Bulls make money – Bears make money & Pigs make S_ _T. We still are hovering at multi-decade lows on both natural gas and power pricing. If I was smart enough to call the absolute bottom, I would not be here writing this post. What I do know is that locking in at these historic lows will have a positive budgetary impact and act as a tremendous hedge against future inflation which is just around the corner. Therefor I favor paying up slightly for the longer terms which may sacrifice some short term savings but pay out huge long term dividends. Let’s keep in mind that in many areas, non-commodity price components have been escalating and are expected to continue to escalate which will compound the inflationary impact when the commodity side turns up.

THIS IS THE TIME TO HEDGE OUT!