Approaching Potential Buying Opportunity?

My reports focus on Natural Gas 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.

Starting with my March 7th Energy Alert, I warned the characteristics of a major bottom were in place, and since my March 7^th Energy Alert, Natural Gas has remained in an uptrend with no major corrections. As you can see in the chart below, Natural Gas has rallied 86%, trading from a low of $1.611 per MMbtu on March 4^th to a high of $2.998 on July 1st:

In my June 1^st Energy Alert, I discussed another characteristic of a major bottom, which leads to a Bull Market. The term “Bull Market” is most often used to refer to the stock market, but can also be applied to anything traded, such as bonds, currencies and commodities. A classic characteristic of Bull Markets is over time they form a series of higher highs and higher lows, which as you can see in the chart below is what has taken place since we reached the March 4^th low at $1.611:

In the above chart I circled the highs in green and the lows in red, and drew a red line from each high to its correction low. As you can see the corrections have been shallow since reaching the Bull Market low on March 4^th.

As I explained in my June 1^st Energy Alert, when markets reach major bottoms, most traders don’t believe prices will continue higher; therefore, they hold off buying, hoping prices will again decline. But Bull Markets are unrelenting, and don’t give traders a second chance to buy near the bottom. Pullbacks tend to be shallow and don’t surpass the previous low.

Therefore, after reaching its most recent high of $2.998 on July 1^st, the question is, how much lower will Natural Gas go before reaching its next higher low? In the chart below I show 2 potential objectives for the next higher low:

The first and most likely potential objective for Natural Gas’s would be a test of this year’s calendar high of $2.495, which we reached on January 8^th. Bull Market lows tend to hold above previous import highs; therefore, if you delayed hedging Natural Gas or Electricity hoping for lower prices, I recommend locking in your rates if Natural Gas declines to near $2.50 in the near-term.

Also, it is important to understand you don’t need to catch the exact near-term low for your next hedge to be effective long-term. As I explained in my June 1^st Energy Alert, Natural Gas and Electricity rates were likely not near the highest prices in this cycle; therefore, the risk of higher prices greatly surpass the reward of delaying, hoping for slightly lower prices, which is why I recommend locking in your next hedge on any near-term weakness.

Even in the unlikely event Natural Gas reaches the second price objective near $2.20, and tests the higher high of $2.199 reached on Apr 27^th, hedges entered near $2.50 will still be effective long-term. I base this on the fact over the last 20 years, the 7 previous times Natural Gas traded near this year’s March 4^th low, the average price was always higher the following 12, 24 & 36-months.

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