January Thaw a Buying Opportunity?

In my Jan 23^rd Energy Update, I said Natural Gas supplies were decreasing at a much higher rate than the 5 Yr. Avg., and even if the rate until the end of the winter heating season slowed to a pace equal to the 5 Yr. Avg., supplies would be approximately 24% below the 5 Yr. Avg.. But if we are colder than normal in February and March, supplies would end the winter heating season 30% or more below the 5 Yr. Avg., and prices would likely be much higher by the end of March.

Therefore, weather will be the most important factor influencing Natural Gas and Electricity pricing over the next 2 months. We are presently experiencing a “January Thaw” throughout much of the United States, which is decreasing heating demand, and the EIA is expected to announce that for the weeks ending Jan 26^th and Feb 2^nd, Natural Gas usage will be lower than normal. But as you can see below, starting on Feb 3^rd, NOAA is forecasting colder than normal weather will return and the draw of Natural Gas supplies is expected to be again above normal.

The return of cold weather later this week will result in Natural Gas supplies being more than 20% below the 5 Yr. Avg. by Feb 16^th; therefore, the January thaw triggering a short-term decline of Natural Gas over the weekend should be considered a buying opportunity.

I can say this because as discussed in my last 2 Energy Updates, 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:

Anytime you can purchase a commodity near the lower end of its long-term trading range while supplies are significantly below the 5 Yr. Avg., it is prudent to do so.

 Conclusions:

 The January thaw slowed the draw of Natural Gas supplies, which triggered a decline in the price of Natural Gas over the weekend. But cold weather will return later this week, and Natural Gas supplies are expected to be more than 20% below the 5 Yr. Avg. by the middle of February; therefore, Natural Gas near the lower end of its long-term trading range is a buying opportunity 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.

Ray Franklin
North American Energy Advisory
Senior Commodity Analyst