Mild Weather into Early December Delays Natural Gas Price Increases?

(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 explain why the recent mild weather experienced throughout most of the United States has kept a lid on Natural Gas prices near-term, but the risk of higher prices long-term remains high, and the risk versus reward ratio continues to favor hedging the cost of Natural Gas and Electricity near present price levels.

In my Nov 6^th Energy Alert, I said 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 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.

The mild weather experienced throughout most of the United States into early December, as shown in the chart below, as expected led to a limited decline in Natural Gas prices, but also as expected prices have maintained the pattern of higher highs and higher lows:

As you can see in the above chart, the recent decline from a long-term perspective was not significant, and prices remain above last winter’s low near $2.50 per MMbtu.

This is very similar to the pattern formed in 2012 when Natural Gas rallied from its spring low, and maintained a pattern of higher highs and higher lows prior to an explosive rally during the winter of 2013/14 due to cold weather; therefore, as shown by the green arrow, the downside reward potential of a warm winter this year is far exceeded, as shown by the red arrow, by the upside risk of a cold winter this year.

Conclusions:

The recent mild weather led to a mild pullback in Natural Gas, but with supplies still expected to remain below the five-year moving average the risk versus reward ratio continues to favor 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