Natural Gas Surplus Continues to Evaporate & Prices hold above $2.50!

My reports focus on Natural Gas because it is the largest source of energy for the generation of Electricity in many regions; therefore, Natural Gas and Electricity rates are highly correlated.

In my Aug 3^rd Energy Alert, I said this year’s El Nino induced mild winter, left Natural Gas supplies at a record high, which on April 1^st was 68.5% higher than last year. The surplus of 1,008 Bcf was huge and led many to believe we would complete the injection season at a new record, but I pointed out injections this year were much lower than last year, and the surplus was evaporating.

I promised to monitor the EIA’s weekly storage reports, and give you updates on how quickly Natural Gas’s surplus was evaporating and possible ramification on pricing, which is the purpose of this report.

When I wrote the Aug 3^rd Energy Alert, the surplus was 436 Bcf above last year. Since then the EIA has released 3 more weekly reports and as you can see below, injections continue to be much lower than last year:

The total injection of 45 Bcf for the last 3 weeks is 109 Bcf less than last year’s injection of 154 Bcf for the same period, and we are now only 327 Bcf above last year. Analyst estimate injections for the next 4 weeks will be approximately 150 Bcf, which is far below the 309 Bcf injected last year for the same period, and if the estimates are accurate the surplus will continue to evaporate.  

As I explained in my Aug 3^rd Energy Alert, if we remain on this trajectory, we will end the injection season close to the levels of fall 2012, and similar to 2012, we could be in the early stages of a Bull Market with rates moving much higher before reaching a top in this cycle.

The potential price ramifications can be seen in the chart below:

After reaching a multiyear low in the Spring of 2012, similar to this year, prices moved higher maintaining a pattern of higher highs and higher lows. Therefore, if you have not already hedged your cost of Natural Gas and Electricity, I recommend doing so near present levels. The graph below shows where Natural Gas is trading today:

After my Aug 3^rd Energy Alert, cooler weather moved into the high energy usage areas in Northcentral and Northeastern United States thereby decreasing cooling demand, and Natural Gas declined to $2.523 on Friday, Aug 12^th, nearly reaching the $2.50 objective discussed in my Jul 20^th and Aug 3^rd Energy Alerts.

But after successfully testing my price objective near $2.50, Natural Gas again moved higher. Although it is possible we could retest $2.50 or even trade below $2.50, as discussed in previous reports, hedges entered near present levels would be effective from a long-term perspective. I base this on the fact that over the last 20 years, the 7 previous times Natural Gas traded near this year’s March 4^th low, the average price was always higher the following 12, 24 & 36-months.

As a hedger your objective should not be to catch the exact bottom, but to reserve a rate lower than the expected average rate over the term of the 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. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Commodity Analyst
727-400-3170