UPDATE of November 2nd Energy Alert

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

In my Nov 2^nd Energy Alert, I asked the question is the pullback to the 200-Day Moving Average a buying opportunity? I pointed out the most common long-term moving average used to define long-term trends is the 200-day Moving Average, and when a market pulls back to the 200-Day Moving Average often it is a buying opportunity.

In my Nov 2^nd Energy Alert, I also said the mild weather we experienced since mid-October was expected to continue until mid-November, but several meteorologists were forecasting colder weather would arrive in the second half of November. Therefore, I believed Natural Gas would likely hold above the 200-Day near-term, and we were close to another sharp rally in Natural Gas and Electricity rates.

But weather forecasts beyond 2 weeks can be extremely fickle and subject to change, and as you can see in the NOAA’s 8 to 14 day forecast below the cold weather anticipated in the second half of November has failed to materialize:

Therefore, after successfully testing and bouncing off the 200-day Moving average on Oct 26^th, as you can see in the chart below prices penetrated the 200-Day on Nov 8th, and although Natural Gas rallied yesterday closing above the 200-day, the decline may continue in the near-term.

But if prices continue lower near-term should this be considered a long-term buying opportunity? The answer can be found by looking at Natural Gas prices from a longer-term perspective.

Starting with my March 7th Energy Alert, I pointed out the similarities between the spring of 2012 and the spring of 2016.

The 5-year chart of Natural Gas below shows the similarities include what is taking place now:

After reaching a multiyear low in the spring of 2012 below $2.00 per MMbtu, Natural Gas prices trended higher, but as you can see in the above chart the price decline in the fall of 2012 due to mild weather set-up a long-term buying opportunity.

Although, past performance does not guarantee future results it is clear the upside risk is substantial from a long-term perspective, and I believe Natural Gas’s present decline due to the mild fall we are experiencing should be considered a buying opportunity from a longer-term perspective.

I believe prices are primed for the next rally, and will quickly reverse when NOAA’s 8 to 14 day forecasts cooler weather, and I will prepare another Energy Alert when NOAA tells us cooler weather is on the way. Therefore, if prices decline short-term, and you have not hedged your cost of Natural Gas and Electricity, I recommend you take advantage of a near-term decline in prices to hedge your cost of Natural Gas and Electricity.

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 now. 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