Monitoring 8 -14 Day Temperature Forecast

In my last Energy Alert written 4 days ago I stated based on current supply levels, Natural Gas is extremely undervalued at the present time, If you have not already read my July 21^st Energy Alert, I would encourage you to do so, so you can fully appreciate what I will be writing in today’s Energy Alert.

In today’s report I will explain why in the near-term NOAA’s 8 to 14 day national temperature forecast will be my primary short-term focus. Weekly injections of Natural Gas have been running above average based on increased production and low demand due the very mild weather experienced thus far this summer. Natural Gas prices responded by declining steadily since June 16^th. The chart below reflects the straight line decrease of the nearby contract of Natural Gas from $4.89 per million BTUs on June 16th, to a low of $3.74 per million BTUs after this week’s storage report.

Sharp straight line moves occur when the market reacts to an unexpected event. No one could have predicted the sustained milder than normal temperatures we have experienced thus far this summer, but the market’s response was not surprising. In my May 29^th Energy Alert and reemphasized in my July 21^st Energy Alert I stated we could reach the above price objective if we experienced a mild summer.

Based on NOAA’s present 8 – 14 day temperature forecast shown below it is very possible we will reach my objective near $3.60 per million BTUs.

Going forward we will monitor NOAA’s new 8 – 14 day forecast each day. The market has plunged in a straight line due to the sustained cool weather we have experienced thus far, but it is important to note after last week’s EIA report our storage levels are still 23.5% below the five-year average. As I said in my introduction, based on current supply levels, I believe Natural Gas is extremely undervalued at the present time, and when NOAA forecasts above average 8 – 14 day temperatures, Natural Gas will likely respond by rallying sharply. No one can precisely foretell when this will occur, but I can say with confidence it will occur, and as always I do not advocate trying to catch the exact bottom.

In 2000, my loving wife was concerned that I had moved all of our stock assets into cash and many of her associates at work were still profiting from the market’s rally. What I said to her at that time was although I believed the market could go marginally higher in the near-term there was one thing I was certain of; there would be a time in the future when it would be MUCH LOWER than today. I feel the same way about Natural Gas today. Although I believe Natural Gas could trade marginally lower in the near-term there is one thing I am certain of, there will be a time in the future when it will be MUCH HIGHER than it is today.

In the near-term, I will closely monitor NOAA’s 8 – 14 day temperature forecast each day, and we will let our clients know when NOAA forecasts above average temperatures are on the horizon, but I do not recommend waiting for our phone call. I believe anyone who has not already hedged their Natural Gas or Electricity, which are highly correlated to each other, should consider doing so as soon as possible to take advantage of the today’s historically low prices. Remember, this market is poised to rally sharply, and the trigger for the rally can happen at a moment’s notice. As I have stated many times hedgers should not try to catch the exact bottom, which is the role of a speculator. If a speculator misses the exact bottom it does not cost them anything except opportunity cost, and opportunity cost is not as expensive as lost capital. But hedgers don’t have that luxury, since if they miss the bottom they are inherently short the market.

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