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Is the Mild Weather in December an Early Christmas Present for Buyers of Natural Gas and Electricity?

Energy News Update: December 18th, 2023 Is the Mild Weather in December an Early Christmas Present for Buyers of Natural

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Energy News Update: December 18th, 2023

Is the Mild Weather in December an Early Christmas Present for Buyers of Natural Gas and Electricity?

In our November 27th Energy Update we said although it was possible, Natural Gas could go a little lower, as you can see in this chart, the upside risk was far greater than the downside reward potential.

But as it turned out, those who were willing to take the risk rates could go a little lower were rewarded with extraordinarily mild weather throughout the United States until at least Christmas:

And the extraordinarily warm December weather has resulted in Natural Gas moving a little lower, but it is important to note warm weather pullbacks in their Bull Market cycle were early Christmas presents in 2020 and 2021:

As you can see in the above chart, after reaching December lows due to warmer than normal weather in 2020 and 2021, Natural Gas rallied into the new year. It is also important to note in both cases, Natural Gas rallied even though the warmer-than-normal weather in December was followed by warmer-than-normal weather in January. 

In January 2021, the average contiguous U.S. temperature was 34.6°F, 4.5°F above the 20th-century average, tying with 1923 as the ninth warmest in the 127-year record. In January 2022, the average contiguous U.S. temperature was 31.0°F, 0.9°F above the 20th-century average, ranking in the middle third of the 128-year record. 

But what is expected in January this year?

The ECMWF (European) model is generally considered to be the most accurate global model, and their model is forecasting colder-than-normal temperatures in January this year for the contiguous U.S:

If in 2020 and 2021 Natural Gas rallied into the new year with warmer-than-normal temperatures in January, what do you believe Natural Gas will likely do this year if we experience a colder-than-normal January?

Commodity markets are forward looking, and after reaching a December low last week, Natural Gas appears to be rallying in anticipation of higher prices when colder weather returns in January:

Past performance does not guarantee future results, but hopefully, today’s report clearly explains why we believe the recent decline due to mild weather in December is an early Christmas present for buyers of Natural Gas and Electricity!

And understand why if you have not already hedged your cost of Natural Gas or Electricity, we recommend taking advantage of this year’s warm weather in December to protect yourself against the risk of higher Natural Gas and Electricity prices long term.  

Not every client’s risk tolerance and hedging strategy are 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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