(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.)
In my Jan 11th Energy Update, I said commodities prices are primarily determined by supply/demand, and a good measure of the adequacy of supplies is a comparison to the 5 Yr. Avg., and anytime supplies are below normal the risk of higher prices increases. This year we began the winter heating season, which runs from November thru March, slightly below the 5 Yr. Avg., and the draw on supplies has continued to increase.
Every Thursday, the EIA, reports the amount of Natural Gas in storage as of the previous Friday, and this Thursday, the EIA is expected to announce supplies decreased 272 Bcf from the previous week, leaving us 16.9% below the 5 Yr. Avg. If the draw on supplies until the end of the winter heating season continues at a pace equal to the 5 Yr. Avg., by the end of March, supplies will be approximately 24% below the 5 Yr. Avg.!
But if we experience colder than normal weather in February and March, supplies will end the winter heating season 30% or more below the 5 Yr. Avg., which would likely lead to much higher prices. Therefore, it makes sense to protect yourself from high prices, but are there still good values in purchasing Natural Gas and Electricity near present price levels? The chart below, shows Natural Gas is still very low from an historical perspective; therefore, the answer is yes!
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 is a great value for hedgers at present price levels, especially considering how far below the 5 Yr. Avg. Natural Gas supplies are presently, and how far below the 5 Yr. Avg., they are projected to end the winter heating season.
Natural Gas supplies are decreasing at a much higher rate than the 5 Yr. Avg., and even if the rate until the end of the winter heating season slows to a pace equal to the 5 Yr. Avg., supplies will be approximately 24% below the 5 Yr. Avg., but if we have colder than normal weather in February and March, supplies would end the winter heating season 30% or more below the 5 Yr. Avg., which would likely lead to much higher prices. Therefore, with Natural Gas still trading near the lower end of its long-term trading range, it is a great value for hedgers.
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: http://naea.wpengine.com/are-continued-decreases-in-supplies-increasing-risk-of-higher-natural-gas-prices/ on