(My reports focus on Natural Gas as it is now the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)
The price of all commodities is primarily determined by supply/demand, and a good measure of the adequacy of supplies is a comparison to the 5 Yr. Avg. Anytime supplies are lower than normal the risk of higher prices increases, and this year we began the winter heating season slightly below the 5 Yr. Avg., and the draw on supplies has continue to increase.
Every Thursday, the EIA, reports the amount of Natural Gas in storage as of the previous Friday. Today the EIA announced the very cold weather experienced early in January caused Natural Gas supplies to decrease 359 Bcf from the previous week, which is the largest one week decline of supplies in history, breaking the old record of 288 Bcf by 71 Bcf!
We are now 12.1% below the 5 Yr. Avg., and by Jan 19th continued cold weather nationally is expected to decrease supplies to approximately 17% below the 5 Yr. Avg.
Obviously Natural Gas supplies are very tight currently, and the risk of higher prices is increasing this winter. The only question is there still good value in purchasing Natural Gas and Electricity near present price levels? Although short-term pullbacks are always possible, as you can see in the chart below, Natural Gas is still very low from an historical perspective:
Clearly from a long-term perspective Natural Gas, which is highly correlated to the price of Electricity is near the lower end of its trading range, and offers great value for hedgers at present price levels, especially considering how far below the 5 Yr. Avg. Natural Gas supplies are.
Natural Gas began the winter heating season with supplies slightly below the 5 Yr. Avg., but supplies are becoming increasingly tight due to colder than normal weather and is poised for an explosive rally. Therefore, with Natural Gas still trading near the lower end of its long-term trading range, it is a great value for hedgers near present price levels.
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://naea.today/natural-gas-inverted-head-shoulders-pattern-forecasting-higher-prices-2-2-2-2-2-2/ on