Current Analysis

The purpose of this analysis is to give you an update on the pattern we pointed out to our clients on our website in August, and discuss the implications it will have on hedging strategies for the remainder of 2009 and into 2010/2011. Our previous analysis forecasting a cyclical low would be reached in September is available upon request.

Before continuing with the implications of the forecasted cyclical low actually being reached on 09/04/09, we need to again point out the cost of electricity and natural gas is highly correlated. In fact, of all markets actively traded on the NYMEX, natural gas has the highest correlation to the cost of electricity, which is why we focus on natural gas regarding the timing of fixing rates for both natural gas and electricity.

In our last analysis we pointed out that every year since 1995, when the price of natural gas was lower in the summer than the previous winter, a cyclical low was reached each time in September, and the average price of natural gas was always significantly higher over the next 12, 24 and 36 months. This pattern occurred 7 times since 1995 and as forecasted the pattern was repeated for the 8th time this year with the low reached on 09/04/09.

Since in the previous 7 occurrences the average price of natural gas and electricity were always higher over the next 12, 24 and 36 months, we recommend locking in fixed rates on any pullback in natural gas in the fourth quarter of 2009.

The following chart contains a 14-year history of natural gas covering the period from 1995 to 2009. Note we have drawn a red line showing the 12-month increase in prices from each September low including the most recent low reached on 09/04/09. We look forward to reviewing the key points outlined in the above analysis while you have this chart in front of you. Our goal is to provide you with all of the data you need to protect your company with the lowest possible price for years to come.

To learn more and see what rates you qualify for, call us today at 866-253-9600.

 

Review

The purpose of this analysis is to point out a pattern, which has occurred 7 times over the last 15 years with the same result each time, and I will explain why I believe this pattern is about to be repeated, and if so, why you should lock in a fixed rate in anticipation of a cyclical low in September 2009.

Before beginning, I need to point out the cost of electricity and natural gas is highly correlated. In fact, of all markets actively traded on the NYMEX, natural gas has the highest correlation to the cost of electricity, which is why I focus on natural gas regarding the timing of fixing rates for both natural gas and electricity.

It is also important to understand that we are looking at the lowest cost of electricity and natural gas since the fall of 2002. On the face of it, this should be enough motivation to consider locking in a fixed rate, but the following will explain why I believe you should consider doing so in the near future:

1. I have identified a strong seasonal tendency for the price of natural gas to rise in the fall due to the hedging activity of large users of natural gas. Every year the total amount of natural gas needed for the winter season is stored in holding tanks by the middle of November. The price of natural gas is then primarily determined by the severity of the winter season. The price of natural gas tends to rise prior to the winter season as large users enter hedges as protection against the risk of higher energy costs in the winter.
   
   
2. This seasonal tendency is especially strong when natural gas prices are lower in the summer than the previous winter. Large hedgers are aware of the potential for higher energy pricing during the winter and being risk averse they appreciate the opportunity to hedge at a lower cost than the previous year. It is important to note in the 7 instances since 1995 when natural gas prices were lower in the summer than the previous winter, the price always rallied into the winter season.
   
   
3. The next point may not be as intuitively obvious. Why does natural gas begin rallying in September rather than November when the storage tanks are completely filled? The answer is found in the fact that markets are forward looking and since everyone realizes the storage tanks will be filled by November, the market anticipates the event and hedge positions are entered a bit early in preparation for the uncertainty of the winter ahead. Remember, large hedgers are risk averse, they don't feel compelled to catch the exact bottom; their greater concern is that by delaying they might miss the opportunity to lock in affixed rate at a historically low price.
   
   
4. Is hedging at this time in the best interest of your business? Consider this fact. Every year since 1995, when the price of natural gas was lower in the summer than the previous winter, a cyclical low was reached in September, and the average price of natural gas was always significantly higher over the next 12, 24 and 36 months.
   
   
5. When a strong seasonal tendency is observed over an extended period of time, invariably there is a fundamental factor behind the tendency. The energy markets historically trade in a series of peaks and valleys, which to a large extent are determined by supply/demand factors. When prices are high producers expand production and conversely when prices are low producers cutback production to reverse the decline in prices. The most recent Baker Hughes rig count, which is a survey used by many in the petroleum industry, has declined from 1,990 on 08/15/08 to 966 on 08/14/09.
   
   
6. Although no one knows the precise day when the final lows for natural gas will be reached, I believe based on the above there is a high probability we are near a cyclical low, which based on past history will likely occur within the next few weeks, and I do not recommend waiting until the last minute to lock in a fixed rate. The risk of a storm is always a concern and if a major storm damages our energy assets in the Gulf Of Mexico, then the energy markets will rally prematurely and leave today's low pricing behind.

The above attachment contains a 14-year chart of natural gas covering the period from 1995 to 2009. Note I have drawn a red line showing the 12-month increase in prices from each September low. We look forward to reviewing the key points outlined in the above analysis while you have this chart in front of you. Our goal is to provide you with all of the data needed to protect your company with a low fixed rate at the appropriate time. If you contact us we will prepare a detailed analysis customized to your situation, which will help you make an informed decision.

To learn more and see what rates you qualify for, call us today at 866-253-9600.