The Kobiona Monitor

Volume 3 / Number 7 July 30, 2021

Kobiona’s leadership has enlisted the help of our Market Intelligence Desk to craft this monthly publication to share major market dynamics impacting future power and gas prices. As every client’s situation is unique, we encourage you to review market movements with us to decide whether any action on your part could serve to lower your future costs or avoid known, coming increases.

Shale 3.0: The Era of “Discipline”
We’re going to go out on a limb and bet this is going to be our least popular edition ever… the theme is discipline, and who gets excited about that, right?

We speak of discipline among two constituents – the discipline oil and gas producers have finally adopted in the “third wave” of the shale revolution to stop bleeding cash, and the discipline energy buyers will need to adopt – and very quickly – in order to preserve cost stability around their energy expenses.

Graph of percentage in change due to Covid

What’s Changed for Producers
Typically when oil and natural gas prices climb to the prices we are seeing at present, we see increased rig counts and production soars a few weeks later.

Not in 2021.

Graph of crude oil prices

Deloitte estimates the fracking industry lost $300 billion in the last decade. Producers consistently dumped every dollar earned and borrowed into ramping up production, seemingly at any cost.

Noah Barrett at Janus Henderson says, “Producers would typically reinvest 120% to 130% of their operating cash flow in new production. Now, that figure is closer to 70% or lower, leaving plenty of cash for shareholder payouts.”

Post-COVID, producers have instituted a new level of restraint and are holding back on increasing output, even at higher prices.

For Marathon Oil, this new discipline – halting production in addition to other stringent cuts on operational expenses – has brought the reward of moving their stock up over 110% from a year ago.

Marathon Oil Corporation stock price

Analysts debate at what price oil might have to hit for producers to look at the economics differently. Is the magic number per barrel $80, $90, $100 that finally gets investors interested in increasing output again?

We’re thinking it’s close to $100, but by that point gas and power will likely have risen so much that additional output won’t push prices back down to where they are at present.

NYMEX Prompt Month Gas Crosses $4
As one piece of evidence that all of the above is true, for the first time in over 19 months (since December 2018) NYMEX prompt natural gas topped $4/MMBTU on Friday, July 23.

Henry Hub stock price

As the next, with lagging injections all season storage inventories (at 2,678 BCF) remain below both the 5-year average (6.2%) and last year’s levels (16.6%).

Graph of working gas in underground storage

Power futures continue to rise as a result across all regions.

Forward Power price trends graph

Source: Constellation

What’s a Buyer to Do? Be Just As Disciplined!
This advice isn’t new, but we’re going to repeat it for any of you readers still looking at price refreshes weekly.

Person holding a light bulb and bag of money

1. Stop looking at prices weekly. In all seriousness, a price is just one piece of information and arguably the wrong place to start for an energy budget. Following the market without a target – or with an unrealistic one – is an emotionally-driven exercise that most often results in disappointment, lost opportunity and higher expenditures.

2. Abandon the hope for bargains. While modest pullbacks will occur – and you should be ready to act quickly if they do — do not expect significant slides for at least 24 months or longer. Why? Reread the Shale intro!

Buyers would be best served to delete price information from the last year from both their minds and their email and start fresh with an informed market perspective and new targets. 2020’s numbers are not returning any time soon, and hope is not a strategy.

3. Devise an Energy Plan, Budget and Procurement Strategy for 2022 -2025. This can be as simple one page, but getting your plan on paper will prevent you from reactively entertaining every option that comes your way.

Can Kobiona help me draft this plan? Of course. Disclaimer: To make your budget work you may need to consider adopting approaches you haven’t employed in the past.

Questions? For those tasked with procuring power and gas for the first time — or the tenth time — the industry can seem overwhelming with densely-technical and sometimes conflicting information. We welcome your questions on how to apply our observations, as well as your feedback on The Kobiona Monitor. Please share how we can make this publication more useful by calling us on 844-209-7972, or contacting us via email, info@kobiona.com.