UPDATE of December 30th Energy Alert

My reports focus on Natural Gas rates 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.

In my Dec 30^th Winter Update, I emphasized when Natural Gas trades below $2.00 per MMbtu, it is an unsustainable price, which leads to higher prices for years to come. This is primarily caused by the effect low prices have on supply and demand, and I explained in more detail the reason for this in my Dec 30^th report. You can access this report by clicking on the link for Dec 30^th Energy Alert.

In today’s update, I will present empirical evidence supporting the theory that the average price of Natural Gas will be higher over the next 12, 24 & 36 months, than where it is today. But a theory is only meaningful if it is supported by empirical evidence.

The 20-year chart of Natural Gas below is the empirical evidence supporting my belief that Natural Gas prices and correspondingly Electricity prices will be higher on average over the next 12, 24 & 36 months.

In the above chart, I point out over the last 20 years Natural Gas has been below $2.00 per MMbtu 7 times and each time experienced an explosive rally as shown by the green lines to the high shown in red. Also, in every instance, the average price over the following 12, 24 & 36 months was higher than $2.00 per MMbtu.

The empirical evidence clearly supports securing hedges in Natural Gas and Electricity when Natural Gas trades near $2.00 per MMbtu. As I am writing this report Natural Gas is trading at $2.27 per MMbtu, and if you have not already secured a fixed rate I recommend you do so this week.

My concern is although the Midwest and Northeast will experience a brief respite from the cooler weather experienced over the last week, AccuWeather is forecasting brutally cold weather will return next week.

The cold blast next week will likely support higher prices; therefore, I recommend securing hedges at this time. Although if we experience warm weather in February and March, it is possible rates could retest the Dec 18^th low, I do not recommend waiting for a possible retest of the Dec 18^th low.

In my Dec 30^th report, I said the Dec 18^th low was an unsustainably low price and we may not return to that price level. But even if we did and you purchase a bit early, hedging near present levels will be effective from a longer-term perspective. The goal of hedging is to secure a rate lower than the average expected long-term rate, it is not catching the exact bottom.

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