Energy Update | October 14th, 2019
Natural Gas Pulls Back to Buy Zone In my September 19th Energy Update, I said near-term, weather factors would influence
Natural Gas Pulls Back to Buy Zone In my September 19th Energy Update, I said near-term, weather factors would influence
In my September 19th Energy Update, I said near-term, weather factors would influence the direction of energy prices, but even if we have a milder than normal winter, the downside reward potential of lower prices is minimal versus the upside risk of higher prices.
Since September 19th, Natural Gas’s demand for the generation of Electricity was lower than normal due to relatively mild weather throughout most of the United States and prices declined from $2.71 to a low of $2.19 per MMBtu on Friday before rallying to $2.30 per MMBtu this morning:
As I pointed in my July 1st Energy Update, Natural Gas prices below $2.50 per MMBtu are rare occurring only in 2001, 2012 and 2016, and always preceded multiyear periods of higher prices. This year we reached a seasonal low of $2.03 per MMBtu in early August prior to rallying briefly back above $2.50 per MMBtu in September before again declining to this historically significant buy zone in October.
Although no one knows how long Natural Gas will remain within this year’s buy zone, past history indicates time could be running short. The chart below shows how long it took for bottoms to be completed in 2001, 2012 and 2016, from the time Natural Gas declined below $2.50 per MMBtu until it stayed above $2.50 for the following 3 years:
The last 3 major bottoms were completed in 105 days in 2001, 104 days in 2012 and 170 days in 2016. This year it has been 119 days since we first declined below $2.50 per MMBtu on April 18th. Therefore, we are in the mid-range of time needed to complete a major bottom.
Major bottoms normally are not completed quickly since it takes time for long-term positions to be built by Commercial hedgers. As I pointed out in my July 29th Energy update, when Natural Gas declined below $2.50 per MMBtu Commercial hedgers began aggressively buying Natural Gas futures and they now have had sufficient time to build their long-term positions.
I am not sure how much longer it will take to complete this year’s bottom but based on past history it is wise to secure an energy agreement near present price levels. Although rates can decrease slightly in the short-term, I don’t recommend trying to catch the exact bottom. This is the role of a speculator. If a speculator misses the exact bottom it will not cost them anything other than opportunity cost, and opportunity cost is not as expensive as lost capital. But hedgers don’t have that luxury. If hedgers miss the bottom they are inherently short the market, and it is not wise to be short a market when since 2000, there were only 3 previous periods when Natural Gas traded below $2.50 per MMBtu, and it always preceded much higher prices for an extended period.
Based on the empirical evidence delineated in this report, I believe Natural Gas and Electricity prices are poised to increase long-term, and it is wise to secure energy agreements near present price levels. In the near-term, weather factors will influence the direction of energy prices, but the downside reward potential of lower prices short-term is minimal versus the upside risk of higher prices long-term.
Not every client’s risk tolerance and hedging strategy is the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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