Natural Gas Holding Key Support Despite Negative News a Buy Signal?

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

In my Feb 5^th Energy Update, I said when supplies are tight, prices often react violently to unexpected changes in weather forecasts, leading to high volitility and overreactions. Therefore, I felt with Natural Gas approaching the lower end of the trading range in place since June 2016, NOAA’s unexpected change in their 8-14 day forecast was a potential buying opportunity for hedgers.

Over the last 2 weeks, the news for Natural Gas continued to be very negative, with NOAA unexpectely forcasting warmer than normal weather for much of the United States till the end of February, which substantially decreased heating demand. Last week after NOAA changed their forcaste, I thought Natural Gas would likely break below key support near $2.50 per MMbtu, but as you can see in the chart below, prices remained within the trading range in place since June 2016:

When a market holds key support in the face of negative news it is signalling the path of least resistence is for higher prices.Therefore, I continue to believe, Natural Gas and Electrcity are buying opportunities near present price levels. I realize if NOAA forcastes warmer than normal weather in March, Natural Gas could trade below $2.50 per MMbtu, but I believe any decline below key support near $2.50 per MMbtu will be limited and short-lived and followed by a sharp rally.

I say this because it is important to always evaluate Natural Gas prices and supplies from a long-term perspective. Natural supplies have not decreased as much as previously anticipated, but we are still expected to end the winter heating season at the end of March 15% to 20% below the 5 Yr. Avg. Anytime you can purchase a commodity near the lower end of its long-term trading range while supplies are significantly below the 5 Yr. Avg., it is prudent to do so.

 Therefore, as you can see in the 20-year chart below, Natural Gas prices remain very low from a long-term perspective, and should be considered a buying opportunity for hedgers:

Conclusions:

 NOAA’s unexpected forecast of warmer than normal weather for much of the United States till the end of February caught many traders, including myself, by surprise. And although I realize if NOAA continues to forcaste warmer than normal weather in March, Natural Gas could trade below $2.50 per MMbtu, I believe any decline below key support near $2.50 per MMbtu will be will limited and short-lived and followed by a sharp rally.

Remember, Natural Gas supplies are still ecpected to end the winter heating season 15% to 20% below the 5 Yr. Avg.; therefore, with prices approaching the lower end of its trading range since June 2016, and near the lower end of its 20-year trading range with supplies significantly below the 5 Yr. Avg., the criteria for a good buying opportunity are in place.

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
North American Energy Advisory
Senior Commodity Analyst