Near-Term Hedging Opportunity in April/May

The following update is short, but if you have not hedged your Natural Gas or Electricity it is vital that you read this and understand its implications to your business.

Based on our forecast of higher prices of Natural Gas and Electricity for the winter 0f 2012/13 most of our clients have hedges in place for Natural Gas and Electricity through 2013/14. But we realize we were not able to contact everyone with exposure to Natural Gas and Electricity costs within their businesses; therefore, we are now reaching out to perspective clients with the following recommendation.

We believe we may have a window of opportunity in the next 30-45 days to capitalize on a short-term pullback, and it will be important to take advantage of this buying opportunity because we believe energy supply rates are poised to go much higher in the second half of 2013.

The energy markets are poised to move higher for a variety of reasons, but the following are just a few factors that likely will increase prices further in 2013 and beyond:

1. Continued production cuts by major US NG producers and their impact on NG prices. The number of active gas rigs (389) is the lowest since 1995 and over the last year, the number of gas rigs has declined by 41% from the 658 rigs on line this time last year.
2. Natural Gas producers are in business to maximize profits and it is in their best interest to control supply to insure the adverse effects of oversupply seen in 2011/12 are not repeated. Prices dipped below $2.00 in the spring of 2012, but have since doubled in price due in a large extent to the concerted efforts of reducing production by the largest Natural Gas producers in North America.
3. Continued attacks by EPA and current Administration on coal generation. Recent federal appeals court ruling to uphold EPA’s greenhouse gas rule will further restrict future coal electricity generation. Over 140 coal energy generation plants have closed since 2010.
4. The reason we closely follow Natural Gas prices is that of all markets traded on the NYMEX it is the most highly correlated commodity to the price of Electricity. As the trend for Natural Gas goes, so goes the trend for the wholesale electricity prices.
5. There are other factors such as geopolitical and weather events which will affect energy prices in the future, but for the purpose of this analysis we will not go into them in detail. But it is important to note that those events have the potential of triggering explosive increases in energy prices.
Based on expected milder weather forecasted in mid April in the major usage regions and the normal decrease of energy use between the high demand winter heating and summer cooling periods there should be a short window in which the energy markets pull back before the run up to summer begins. It is important that you are prepared ahead of time to enable you to immediately capitalize on this small window should it suddenly appear as predicted.

A quick perusal of the chart below will help you understand why we are alerting you at this time. The chart is a summary of Natural Gas prices over the last 15 years and it is clear that this market, similar to 2000, 2002, 2005 and 2008, is poised to move much higher in the second half of 2013.

NG Monthly Continuation chart
No one knows precisely when the energy markets will again spike upward, but obviously the upside risk is substantial. If you have not already hedged your cost of Natural Gas or Electricity, then whether you realize it or not, you are short these markets. Again take a look at the above chart and ask yourself…do I want to be long or short this market. We believe the answer is obvious and if the energy markets cooperate and pullback in April we trust this analysis will help you take advantage of the opportunity.

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