SPRING UPDATE

Not every company’s risk tolerance and hedging strategy is the same, but the below 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 get the latest, unbiased facts and trends to help you plan a hedging strategy appropriate for your situation.

In my February 5th report, I explained from an historical perspective rates are very low and in my March 4th report, I detailed why I believe natural gas and electricity rates are setting up for a short covering rally. If you read both reports you understand why we recommend securing fixed rate hedges at this time.
In this report I will incorporate information from my last 2 reports to give you a sense of where we are presently as we complete the winter heating season. Below is a chart of natural gas rates since 2002:

As you can see in the above chart over the last 13 years Natural Gas, which is highly correlated to the cost of electricity has been below present levels only 4.8% of the time, and above present levels 95.2% of the time. Anytime you have an opportunity to secure rates when they have been higher more than 95% of the time over the last 13 years it is 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.

In my last report, I said the Feb 6th low could hold prior to a spring rally taking Natural Gas and Electricity to fair value, which was significantly higher than where it was at that time. But as I write this report due to the mild conclusion of the winter heating season we are retesting the Feb 6th low today.

Below is a one year chart of Natural Gas prices:

Is it possible in the near-term natural gas will break below the Feb 6th low?

It is certainly possible, but considering natural gas prices have been lower than present levels less than 5% of the time over the last 13 years, any time spent below present price levels will likely be short lived. It is also likely any break in prices will be followed by a short covering rally based on the large open interest of large commercial hedgers, which I discussed in last month’s report.

As I wrote last month, over the years, I have found it is wise to follow the lead of Commercial Hedgers. They are more highly capitalized than speculative traders and it is in their interest to move the market based on their capitalization. No one knows how much longer Commercial Hedgers will build long positions prior to the market moving higher, but certainly it is in their vested interest for prices to move higher at some point in time.

Although it is possible rates could go slightly lower in the short-term, I don’t recommend trying to catch the exact bottom at this time. As I have stated in previous reports this is the role of a speculator. If a speculator misses the exact bottom it does not cost them anything except opportunity cost, and opportunity cost is not as expensive as lost capital. But as a hedger you don’t have that luxury, since if you miss the bottom you are inherently short the market, and it is not a good idea to be short a market when prices have been lower than present levels less than 5% of the time over the last 13 years.

Not every company’s risk tolerance and hedging strategy is the same, but 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 get the latest, unbiased facts and trends to help you plan a hedging strategy appropriate for your situation.

To find out more about what programs and options are available in your state, call one of our senior advisors at 1.800.920.4631. We would be glad to answer any questions you have.

Ray Franklin
Senior Commodity Analyst