Reduced drilling activity and capital expenditures (CAPEX) cuts by oil and natural gas producers present a strong risk of higher natural gas and, subsequently, electricity prices in the coming years. In 2020, mild winter weather and record natural gas production levels have dragged natural gas prices to 25-year lows. Also, oil prices have collapsed to 18-year lows due to the splintering apart of the OPEC plus producer group and plans by Saudi Arabia to ramp up output levels to a record 12M bbls/d. To counter low oil and natural gas prices, producers have announced significant cuts in their CAPEX spending for 2020. Further demand destruction triggered by the COVID-19 crisis has also contributed to the sharp drop off in oil and natural gas prices over the first couple of months of 2020.

Reduced CAPEX spending will decrease production levels and tighten supplies, thereby driving energy prices higher in the coming years. Oil producers that make up ~13% of the more than 90 Bcf/d of US natural gas output through the production of associated natural gas supply will play an integral role in helping to drive natural gas and subsequently, electricity prices higher in the coming years.

Although current production levels remain just below record levels, expectations that reduced drilling activity by producers that will curtail production levels later this year has already helped boost Calendar 2021 natural gas prices by more than 30 cents or nearly 14% this year from their record made back in March. When the energy markets turn their focus to the upcoming 2020-21 winter and expectations of increased heating demands, the reduced supply will likely place a higher premium in the markets.