Natural Gas Surplus Quickly Evaporating!

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.

Starting with my March 7th Energy Alert, I warned the technical characteristics of a major bottom were in place, and since than, Natural Gas prices have moved higher. In this report, I will show fundamentals as reflected by Natural Gas storage levels are now also forecasting higher prices.

This year’s El Nino induced mild winter, left Natural Gas supplies at record high levels by the end of the winter heating season. They were slightly higher than the previous record attained in the spring of 2012 after a similar mild winter. In both cases, supplies on April 1^st were much higher than the previous year with 2012 supplies 55.7% higher than the previous year and this year’s supplies 68.5% higher than last year. This year’s 1,008 Bcf surplus on April 1st was huge and led many to believe we would end the injection season with a new record high of Natural Gas in storage, breaking last year’s record of 4,009 Bcf, attained the week ending Nov 20^th, 2015.

The consensus earlier this year was this would lead to lower prices in the second half of 2016, but as I have written since March 7^th, I believe Natural Gas is in the midst of a Bull Market and prices will continue to move higher. In April 2012, many also believed new fracking technology would keep prices low for years to come, but as you can see in the chart below after trading below $2.00 per MMbtu for the first time since 2002, Natural Gas prices more than tripled over the following 22-months:

As previously stated, this year’s surplus of 1,008 Bcf at the end of the winter heating season was huge and led many to believe we would complete the injection season with a new record above last year’s record of 4,009 Bcf. But supplies are now on track to end this year’s injection period much closer to the 2012 supply levels reached at the end of the injection period, which that year was 3,928 Bcf, and as you can see in the above chart prices were in the early stages of tripling from their spring 2012 lows.

I believe we will finish this year’s injection season close to the 2012 supply levels based on the fact that after reaching a surplus of 1,008 Bcf, the injection rate of Natural Gas has been much lower than last year, and last week the EIA reported the surplus is now only 439 Bcf, which is just 15.3% above last year at the same time. Given that we decreased this year’s surplus by 569 Bcf (1,008 – 439 = 569) and we are only halfway through the injection season, if we remain on this trajectory, the remaining 439 Bcf surplus will disappear prior to the end of the injection period, and the potential price ramifications can be seen in the chart below:

If injections this year continue to mirror what took place in 2012, then the evidence favors that we are in the early stages of a Bull Market, and rates have further to go prior to reaching a top in this cycle. We will continue to closely monitor the EIA’s weekly storage reports, and give you updates on how quickly Natural Gas’s surplus is evaporating.

In my July 20^th Energy Alert, I said the most likely potential objective for Natural Gas would be a test of this year’s calendar high of $2.495, which we reached on January 8^th. But persistent warmer than normal weather has increased cooling demand, which is severely limiting the amount of gas going into storage. The present pullback has been very shallow, and if temperatures in August remain above normal, or a hurricane threatens our Natural Gas assets in the Gulf, then prices will likely move higher from here, and not reach my first objective near $2.50.

Therefore, if you have not already hedged your cost of Natural Gas and Electricity, I recommend you do so near present levels.

The graph below shows where Natural Gas is trading today:

Although it is possible Natural Gas will eventually reach the buying opportunities discussed in my July 20^th Energy Alert, as I explained in my July 20th report, you don’t need to catch the exact near-term low for your next hedge to be effective long-term.

Even if rates eventually reached my first stated objective near $2.50, or the second price objective near $2.20, and tests the high reached on Apr 27^th, hedges entered near present levels will still 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.

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