Natural Gas Storage Crisis Developing

Over the last 18-months, we warned the bear market low of 2012 would lead to a bull market similar to 2002-2008. Our Energy Alerts, listed chronologically following today’s analysis, discuss the fundamental and technical factors we felt would lead to increased volatility and substantial upside risk in natural gas and electricity rates.

In my last Energy Alert on Jan 3rd, I stated we were entering the winter heating season with relatively low inventory levels, which meant the risk of higher prices this winter were a real possibility. I also warned the drawdown in natural gas supplies was about to accelerate due to extremely cold weather heading into the high demand areas. Over the last few weeks we have become familiar with the term “Polar Vortex”. The first blast of Arctic air arrived early in January and after a short respite was followed by a second blast, which has stubbornly hung on longer than the first blast.

The EIA announced today a decline of 230 billion cubic feet in their weekly storage report and inventories of Natural Gas now stand at 2.193 trillion cubic feet, which is 22.5% below last year and 16.6% below the five-year average for the week.

The chart below was taken from my Jan 23rd Video Alert and reflected where storage levels were estimated to be 1/31/14 versus 1/31/08.

NG Graph 1/23/14
In my Jan 23rd Video Alert I pointed out that in 2008 when Natural Gas storage levels were slightly higher than present levels it rallied into the Summer. Since my Jan 23rd Video Alert this year’s storage situation worsened with cold weather lingering longer than expected. Next week’s storage report is expected to show another large draw in supplies with supplies likely dropping below 2 trillion cubic feet. The reality of tightening supplies triggered a strong rally in natural gas over the last week.

My Video Alerts recorded on 12/16, 12/19, 1/8 and 1/23 explained why I felt Natural Gas was preparing to break above its spring highs near $4.50 and if and when it did I projected Natural Gas would rally to $6.00. I encourage you to look at these videos to fully appreciate why fundamentally and technically Natural Gas and Electricity are poised to move higher in the first half of 2014.

Shortly after recording my Jan 23rd video alert, Natural Gas closed above its spring 2013 highs for the first time.

Below is an up to date chart of Natural Gas through today, Jan 30th.

NG graph

As you can see after closing above $4.50 last week thereby confirming a breakout above the spring 2013 highs, Natural Gas rallied sharply and nearly reached my objective near $6.00 within one week.

The big question is where do we go from here?

If temperatures are normal in the high usage areas in Feb and Mar, Natural Gas storage levels will be lower at the close of the winter heating season in 3/31/14 than it was in 3/31/08 and natural gas prices will likely trend higher into the summer and marginally exceed the $6.00 price objective I projected in my Video Alerts.

But you should be aware of another possibility. If temperatures are colder than normal, a significant Natural Gas storage crisis could develop this Winter and Natural Gas and Electricity rates could skyrocket and Natural Gas could trade much higher than my original $6.00 price objective.

We are heading towards a period of high volatility. The proper timing for executing hedges will be critical to their effectiveness. The last time Natural Gas experienced a similar storage crisis was in 2003 when storage dropped below 1 trillion cubic feet by the end of March.

The chart below shows what took place not only that year but in the following years.

NG chart
I believe due to many factors influencing supply and demand in the coming years we are entering a period of high volatility similar to 2002 to 2008.

In 2003 Natural Gas storage levels were close to present levels when colder than normal weather in Feb and Mar triggered a rally from $5.00 to almost $12.00 within 2 months. The rest of the year was characterized by high volatility trading from $4.50 to $7.50. In this type of environment proper timing is essential for effective hedging.

If you presently have a variable rate or a fixed rate hedge expiring later this year I recommend you contact one of our energy consultants to help you properly time your next hedge.

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. We 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