Mild December Give Hedgers Early Christmas Gift

In my November 11^th Energy Alert, I stated similar to last year the pullback we were experiencing would be brief and it was important to not delay in securing hedges. I said commercial hedgers would remember last year when after briefly pulling back in January Natural Gas and Electricity rates resumed their rally and rates were higher in the spring.

As you can see in the chart below shortly after my last report, Natural Gas and Electricity rates completed a brief pullback and began to rally again on November 14 as shown by the red line.

Natural Gas and Electricity continued to rally until Nov 26^th as shown again by the red line, but since the Thanksgiving Day Holiday we have experienced unusually milder than normal weather in the large usage areas; therefore, as shown by the green line we have pulled back to retest the fall low reached on Oct 28^th.

The question is how much longer will the market decline and how much lower will the market go?

The answer to the first part of the question is largely dependent on NOAA’s 8 to 14 day temperature forecast. The market is forward looking and will react to the first indication of the return of cold weather. As you can see below NOAA’s present 8 to 14 day forecast is calling for above average temperatures throughout most of the United States until December 23^rd.

Based on the above NOAA temperature forecast Natural Gas and Electricity rates will likely not experience a sustained rally until NOAA forecasts that colder than normal weather is on the horizon. But it is important to note markets are forward looking; therefore, Natural Gas and Electricity rates will likely start to rally prior to the colder than normal weather actually arriving.

The answer to the second part of my question regarding how much lower will we go can be answered by reflecting on the Energy Alert I wrote on September 12^th.

Commercial hedgers know historically rates tend to be higher in the spring than the prior fall’s low, therefore, with rates trading very close to the fall low reached on Oct 28^th, the market will likely rally from near present levels.

In my January 30^th, 2014 Energy Alert when Natural Gas supplies were drawdown to near 10 year lows due to extremely cold weather, I wrote this paralleled what took place in 2003 when storage levels also were drawn down due to a colder than normal winter. In 2003, after experiencing an explosive rally during the winter, the rest of the year was characterized by high volatility trading from $4.50 to $7.50. I stated in this type of environment proper timing is essential for effective hedging.

Below is a chart of Natural Gas showing what took place in the fall of 2003 and spring of 2004:

After pulling back from the winter highs of 2002/2003, Natural Gas reached a low in September 2003 prior to experiencing a slingshot rally similar to what we experienced this year in November

As you can see in the above chart Natural Gas pulled back to retest and holding near its September fall low; thereby giving a technical double bottom buy signal. After holding above the fall low the market went through a period of consolidation prior to rallying higher into the winter.

Also, it is important to note in the above chart although Natural Gas did pullback into the spring, the spring low was higher than the previous fall low.

If Natural Gas does not break below the fall low reached on Oct 28^th, it will also give us a technical double bottom buy signal and we will likely experience a similar scenario this year. We will continue to trade within a choppy consolidation pattern until NOAA forecasts colder than normal weather is on the horizon, and then I believe Natural Gas will rally into the winter. Although the rally will not be sustained, I believe similar to 2003/2004, the spring low of 2015 will be higher than this year’s fall low.

I recommend Natural Gas and Electricity hedgers look at the present warmer than normal weather as an early Christmas gift to be used as an opportunity to hedge their energy rates prior to anticipated higher rates this winter and in the spring of 2015. Remember from a historical perspective rates will likely be higher in the spring than where they are at the present time; therefore, this current pullback should be considered an opportunity to reserve hedges.

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 Energy Analyst