Wisdom of Securing Fixed Natural Gas & Electricity Rates Based on Low Prices.

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

In my April 23^rd Energy Update, I documented the present supply levels of Natural Gas and explained why the delay in building supplies increases the risk of higher prices during this year’s injection season.

Normally the winter draw of supplies is completed by the end of March and the injection season (building supplies for the next winter heating season) runs from April thru Oct. But this year we experienced colder than normal weather in April, which increased heating demand for Natural Gas and supplies declined into late April, which is unprecedented.

In their latest weekly storage report, the EIA announced supplies are now nearly 30% below the 5 Yr. Avg., which is the lowest storage for this time of the year in four years. Unless supplies are rebuilt at a very high rate over the next 6-months, we will start this year’s winter heating season with below average supplies, which increases the risk of higher prices.

The question is, are prices attractive at present levels or should hedgers wait for possible lower prices later? I believe the answer can be found by reviewing the long-term price of Natural Gas in the chart below:

Over the last 18 years, Natural Gas has been above present price levels nearly 95% of the time.

 Conclusions:

No one can absolutely predict the future, but when hedgers can secure rates with supplies significantly below the 5 Yr. Avg. and rates higher nearly 95% of the time over the last 18 years it is wise to do so. This is especially true for hedgers who are risk averse and by securing rates near historical lows they are assured of budget certainty at a low cost for long-term planning in one of their major cost centers.

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
North American Energy Advisory
Senior Commodity Analyst