(My reports focus on Natural Gas as it is the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)
In my Jan 29th Energy Update, I said weather will be the most important factor influencing Natural Gas and Electricity pricing over the next 2 months, and with Natural Gas supplies far below normal, short-term declines should be considered buying opportunities. I pointed out we were experiencing a “January Thaw” throughout much of the United States, which would decrease heating demand, but NOAA was forecasting colder than normal weather would return soon and the draw of Natural Gas supplies was expected to again be above normal.
Cold weather has returned as forecasted last week, but as you can see below, NOAA recently changed their 8-14 day forecast and next week warmer than normal weather is expected to move into much of the United States, and heating demand will be greatly reduced:
In January, cold weather caused Natural Gas supplies to drop 16% below the 5 Yr. Avg, and as shown by the green line in the 2-year chart below, prices rallied sharply, but as shown by the red line, NOAA’s unexpected 8-14 day forecast calling for warmer than normal weather has triggered an equally sharp price decline:
I believe Natural Gas’s recent decline is an overreaction, and a potential buying opportunity. Although NOAA’s latest 8-14 day forecast will result in decreased heating demand, supplies are still expected to remain nearly 20% below the 5 Yr. Avg.
When supplies are tight, prices often react violently to unexpected changes in weather forecasts, leading to high volitility and overreactions. Therefore, with Natural Gas, as shown by the 2 blue lines in the above chart, approaching the lower end of the trading range in place since June 2016, NOAA’s unexpected change in their 8-14 day forecast should be considered a potential buying opportunity for hedgers.
This becomes even clearer when you consider the 20-year chart of Natural Gas below:
NOAA’s recent change of their 8-14 day forecast caught many traders, including myself, by surprise. When supplies are tight, Natural Gas responds violently to unexpected changes in weather forecastes and often overreacts, resulting in good buying opportunities for hedgers.
One of the key factors to consider when looking for a good opportunity is purchasing near the lower end of trading ranges. Therefore, with Natural Gas approaching the lower end of its trading range in place since June 2016, and near the lower end of its 20-year trading range with supplies significantly below the 5 Yr. Avg., the criteria I consider to identity a good buying opportunity are in place.
Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
North American Energy Advisory
Senior Commodity Analyst
This articles was originally posted at: https://www.energyprofessionals.com/tight-supplies-changing-weather-forecasts-high-volatility-opportunities/ on