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Fair Price Model

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The Fair Price Model is a simple calculation that estimates a “neutral” or “equilibrium” price for natural gas by comparing current natural gas in storage to storage levels—a proxy for supply and demand--and prices over the past 24 months. If natural gas is trading above this “Fair Price” value, the commodity is said to be overvalued and downside risk tends to outweigh upside potential whereas if natural gas is trading below this value, natural gas is said to be undervalued and the opposite is true.
However, the natural gas market is forward-looking and trades not on current storage levels but on future storage levels. For this reason, the “Fair Price” is also calculated based on projected storage levels 3 and 5 weeks from now. Together, the three Fair Prices provide much better insight into natural gas pricing and opportunities for investment.
For example, if natural gas is trading at a significant premium (overvaluation) based on current storage levels alone, but is fairly valued at both the T+3 and T+5 timeframes, this might suggest that investors expect an upcoming surge of cold air in the next few weeks to buoy demand and have appropriately bid the commodity higher. Thus, despite the short-term premium, natural gas is unlikely to remain overvalued and a short sale would probably be unwise.
However, if natural gas is fairly valued based on current storage levels but is trading at a significant discount at the T+3 and T+5 timeframes, this suggests that investors are being somewhat cautious or short-sighted regarding a future source of demand and a good buying opportunity might exist.

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Disclaimer: Natural Gas Storage Projections, Intraday Natural Gas Stats, Morning Reports, and fundamental pricing models are released by Powerburn as experimental products. While they are intended to provide accurate, up-to-date data, they should not be used alone in making investment decisions, or decisions of any kind. Powerburn does not make an express or implied warranty of any kind regarding the data information including, without limitation, any warranty of merchantability or fitness for a particular purpose or use.

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