(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 23rd Energy Update, I said the winter draw of supplies normally ends by March 31st and the injection season (building supplies for the next winter heating season) runs from April 1st thru Oct 30th. But this year we experienced cool weather well into April, which increased heating demand for Natural Gas and supplies declined into late April, which is unprecedented.

I pointed out as of Apr 20th, there were 28 weeks remaining in the injection season ending Friday, Nov 2nd. and supplies were approximately 519 Bcf below the 5-Yr. Avg.; therefore, Natural Gas supplies needed to increase weekly approximately 18.5 Bcf more than the 5-Yr. Avg. over the following 28 weeks to return to the 5-Yr. Avg.

In today’s report, I summarize the progress of rebuilding of supplies, and how the continued delay in building supplies may affect Natural Gas and Electricity prices.

After experiencing cooler than normal weather in April that increased heating demand for Natural Gas, we are now experiencing warmer than normal weather in May, which is increasing cooling demand and inhibiting the rebuilding of supplies.

Below is NOAA’s 8 to 14 Day Outlook thru May 30th:

If NOAA’s forecast is correct, as of June 1st, Natural Gas supplies will remain nearly 519 Bcf below the 5-Yr. Avg. Therefore, Natural Gas supplies will now need to increase weekly 23.6 Bcf more than the 5-Yr. Avg. over the next 22 weeks to return to the 5-Yr. Avg. by Nov 2nd

The delay in building suppliers faster than the 5 Yr. Avg is making it more difficult for Natural Gas supplies to return to the 5 Yr. Avg during this year’s injection season, which is increasing the risk of higher prices, and a warmer than normal summer will result in a significant shortfall of Natural Gas supplies prior to this year’s winter heating season, which will likely lead to much higher Natural Gas and Electricity prices.

 Conclusions:

No one can absolutely predict the future, but as seen in the chart below over the last 18 years rates were higher than present levels nearly 95% of the time, and with supplies far below the 5 Yr. Avg., hedgers will be wise to secure rates near historical lows:

 

Securing Natural Gas and Electricity at present levels will assure hedgers 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

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