Energy Alert: Large Change in Projected Gas Storage Leads to Second Test of 50-day Moving Average

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

In my Jan 13^th Energy Alert, I said when a market holds near a key support level in the face of negative news it is signalling the path of least resistance is for higher prices.Therefore, in the near-term prices would likely continue to trade higher next week, and longer-term the pattern of higher highs and higher lows remain in place.

But this tendency can be superseded by further unexpected negative news. The 2 key factors controlling near-term Natural Gas prices are weather estimates and their effect on storage projections. When I wrote the Jan 13^th Energy Alert, the highly respected European model projected a stratospheric configuration similar to what took place in early December, and followers of this model warned colder than normal temperatures in February could be forthcoming.

But over the last week, the European model has changed and it is now projecting warmer than normal weather will persist into the first week of February, which has dramatically decreased the decline in projected net storage estimates for the next 4 weeks. The chart below shows the sharp decrease in the projected decline of storage for the period ending Feb 10^th:

Energy Alert graph for last 7 days net projection, Source: Celsius Energy

As you can see  in the above chart, the estimated decline in storage for the next 4 weeks decreased from 650 Bcf to 514 Bcf from Jan 21^st to Jan 25^th. The decline in estimated supply draw is pressuring Natural Gas prices, and as you can see in the chart below we are again testing the 50-day Moving Average:

If you look closely at the above chart, as shown in the first green circle, in late May, Natural Gas tested the 50-day Moving Average 2 times prior to rallying sharply to a higher high by the end of June.

Frankly I am surprised Natural Gas, as shown by the second green circle, is again holding near 50-day Moving Average in the face of the substantial decrease in the estimated draw in supplies. Therefore, if Natural Gas rallies after tomorrows EIA weekly storage report, then similar to what took place in late May we could be setting up for the next leg up to a higher high.

But if warmer than normal weather persists in February, and storage declines remain below average, it is likely the 50-day Moving Average will not hold, and the next price objective could be the 200-day Moving Average. Therefore, I will prepare an Energy Alert next week to update estimated weather forecasts, projected storage estimates, and most importantly how the market is reacting to both.

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
Senior Commodity Analyst                                                                                           727-400-3170