Rates are Very Low from an Historical Perspective

In my January 6^th Energy Alert I summarized the performance of Natural Gas and Electricity rates in 2014 and discussed what we are facing in 2015 and beyond. If you have not read this report I encourage you to do so prior to reading this month’s Energy Alert.

In last month’s report, I said we might be in the late stages of completing a long-term bullish pattern in Natural Gas. I referred to this pattern as an inverted Head and Shoulders bottom and it is never a good idea to be short a market while it is potentially completing a long-term bullish pattern, and if you have not secured a fixed rate you are short Natural Gas and Electricity.

In this report, I will discuss an additional reason why I recommend hedging your cost of Natural Gas and Electricity at this time. Rates are very low from an historical perspective.

Large hedgers are risk averse and when rates are low from an historical perspective they begin building their long-term positions. They are aware rates could go lower if temperatures in high usage areas are above average during the rest of the winter, but they know the risk versus reward does not favor holding out hoping for lower rates.

As you can see in the chart below over the last 13 years Natural Gas has been below present levels only 4.8% of the time, and above present levels 95.2% of the time.

When you have an opportunity to secure rates within 5% of its low over the last 13 years it is always wise to do so. There certainly may be times in the future when rates are lower than today, but I am confident rates will be higher on average over the next 12, 24 and 36 months than at the present time.

No one can predict the exact bottom in any market and certainly this is true for Natural Gas, but there is a common factor found in most bottoms… complacency. Bottoms are formed when the news appears most bearish and there is no sense of urgency to act. But as I stated earlier, large hedgers realize rates are low from an historical perspective and they begin to build their long-term positions. Conversely, there is a common factor found in tops…fear.  

Typically once the low is reached and complacency is at its highest the market begins to climb until it reaches a spike high based on either a weather or geo-political event and then declines again. Large hedges depend on complacency to build large long-term positions and fear to sell their accumulated large long-term positions.

I believe all the ingredients are in place for a major bottom. This morning the EIA reported a lower than anticipated draw of Natural Gas for the week ending on Jan 30^th. This report is bearish and the market is slightly lower this morning, and we could go a little lower near-term, but we could also be reaching the low for the year today. Remember, bottoms are normally reached with no fanfare or sense of urgency to act. Therefore, if you have not secured your next hedge, I urge you to do so as soon as possible at these very low rates from an historical perspective.

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 Energy Analyst