Christmas Gift Waiting to be Opened

My reports focus on Natural Gas rates because it is now the largest source of energy for the generation of Electricity in many regions; therefore, Natural Gas and Electricity rates are highly correlated.

In my November reports, I said the recent collapse in Natural Gas was an excellent opportunity to enter new hedges and extend hedges already in place. I believe the bearish factors discussed in my reports are already factored in the price of Natural Gas, and today’s low pricing will be short lived and will usher in much higher pricing in the years to come.

My reasoning is based on my belief prices are currently too cheap to be sustained for an extended period of time. Below is an updated 15-year chart of Natural Gas that puts today’s prices into perspective from an historical perspective:

Natural Gas reached a low of $1.947 per MMbtu on Oct 27^th in conjunction with the expiration of the nearby futures contract, and thereby tested the Spring 2012 low of $1.902 per MMbtu, and approached the Fall 2001 low of $1.76 per MMbtu.

The horizontal red line in the above chart is drawn at $2.00 per MMbtu, and 99% of the time Natural Gas has been higher than $2.00 per MMbtu; therefore, it is highly unlikely Natural Gas will trade below $2.00 per MMbtu for an extended period of time.

But as I wrote in my Nov 19^th report if we experience a warmer than normal winter Natural Gas could test the 15-year low near $1.76 per MMbtu, but if it does, it will not be a sustainable price, and would lead to an even more explosive rally.

Below is an updated 12-month chart, which shows what has taken place since my Nov 19^th report:

As you can see in the above chart the very warm fall weather we experienced the last 3 weeks and forecasts for continued warm weather until Christmas in the Midwest and Northeast has pushed rates back down toward $2.00 per MMbtu. We have held above $2.00 per MMbtu thus far, but traders may again attempt to push prices down in conjunction with the expiration of the nearby futures contract on Dec 29^th.

If rates break below $2.00 per MMbtu and make a run toward the 15-year low near $1.76 per MMbtu, I would consider this a Christmas gift for traders and hedgers alike. The gift would be wrapped with a beautiful bow if colder than normal weather is forecasted for early January. But as with any gift it will only be appreciated if you open the gift. Therefore, in my report after Christmas I will let you know if you have a gift waiting to be opened.

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 at this time. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Commodity Analyst
727-400-3170