Natural Gas Starting Winter with Supplies Below Five-Year Moving Average

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

In today’s report, I discuss the potential ramifications of Natural Gas starting the winter heating season with supplies below the five-year moving average. The price of all commodities is primarily determined by supply/demand, and a good measure of the adequacy of supplies is a comparison to the five-year moving average.

Obviously anytime a commodity’s supplies are lower than normal the risk of higher prices increases, but the risk is even greater when the factors leading to lower supplies is expected to continue. In my Oct 12th Energy Alert, I pointed out Natural Gas started its injection season on Apr 1st, with supplies 14.8 % above the 5-year moving average, but the excess supplies quickly evaporated due to increases in LNG exports overseas along with exports to Mexico also increasing substantially after the completion of new pipelines.

The structural imbalances are expected to continue for the foreseeable future; therefore, starting the winter heating season with relatively low supplies increases the risk of much higher prices if we experience a colder than normal winter, and as I pointed out in my last report, with structural imbalances still in place even an average winter will likely lead to somewhat higher prices.

The question of how much rates would increase if we experience a colder than normal winter is difficult to answer, but history tells us the final highs will be well above present levels. This year relatively mild weather has kept prices from moving substantially higher, but the structural imbalances limited declines. The concern is, similar to November 2013, we are starting this year’s winter heating season with below normal supplies.

The chart below shows what took place during the cold winter of 2013/14, and why we should be concerned entering the winter heating season with supplies slightly below where they were in November 2013:

Storage levels in Nov 2013 were slightly higher than today, and as you can see in the above chart, the prior winter, summer and fall were all mild, but the price declines were limited and maintained a pattern of higher highs and higher lows from the spring 2012 low. We are following a remarkably similar pattern this year with the prior winter, summer and fall all mild, but the price declines were again limited and maintained a pattern of higher highs and higher lows, this time from the spring 2016 low. Although the remarkably similar Nov 2013 and Nov 2017 patterns do not guarantee we will experience a cold winter this year, they do indicate what will likely take place if we experience a colder than normal winter.

Conclusions:

Natural Gas is starting the winter heating season with supplies below the five-year moving average and is poised for an explosive rally if we experience a colder than normal winter, and with the structural imbalances still in place an average winter will likely lead to somewhat higher prices, while a warmer than normal winter would likely result in limited price declines and maintain a pattern of higher highs and higher lows, from the spring 2016 low. Therefore, I believe, the risk versus reward ratio favors hedging the cost of Natural Gas and Electricity near present price levels.

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