Ascending Triangle Breakout Did Not Materialize, What Now?

My reports focus on Natural Gas rates 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.

In my May 11^th report, I explained that Natural Gas has been in an uptrend since March 4^th making a series of higher highs and higher lows, and the uptrend could soon accelerate. My concern was based on the fact that Natural Gas was forming an ascending triangle, as shown in the chart below:

As I explained in my May 11^th Energy Alert, ascending triangles are considered continuation patterns because in most instances they are found within a period of consolidation within an uptrend.

But technical patterns are not always 100% accurate, and as you can see below, shortly after my May 11^th report, the ascending triangle pattern failed to hold, and Natural Gas declined towards $2.00 per MMbtu:

Natural Gas’s weakness this week was due mainly to milder than expected weather conditions, which negatively affected demand. The question is, after breaking through the bottom of the ascending triangle, is there a potential price object for Natural Gas?

The chart below shows a “possible” price objective for Natural Gas:

As you can see in the above chart, as shown by the blue rectangle. over the last month, Natural Gas has formed a consolidation pattern. But after breaking through the bottom of the ascending triangle as shown in red, Natural Gas traded to the bottom of the consolidation pattern near $2.00 per MMbtu. If Natural Gas breaks decisively below $2.00 per MMbtu after tomorrow’s EIA Weekly Storage Report, it could set its sights on filling a gap left behind on March 28^th, as shown by the green circle. The gap would be totally filled at $1.852 cents per kWh.

There is no guarantee Natural Gas will decline after tomorrow’s report, but if you did not hedge your cost of Natural Gas and Electricity hoping for lower prices, and it declines after tomorrow’s report, this would be an excellent opportunity for you. Remember, Natural Gas reached a 17-year low of $1.611 MMbtu on March 4^th mainly due to this year’s extraordinarily mild winter cause by El Nino. I have repeatedly warned these low prices were unsustainable, and based this observation on the empirical evidence contained in the 20-year chart of Natural Gas below:

Each time prices dropped below $2.00 per MMbtu, rates were higher on average the following 12, 24 & 36 months. As I wrote in my March 7^th Energy Alert, the longer prices stay low the higher they will go! This is a byproduct of the weaker companies being forced out of business thereby decreasing competition, and the surviving companies are highly motivated to increase prices to make up for lost profits accrued while prices were low.

Therefore, if you held off hedging Natural Gas or Electricity hoping prices would retest the March 4^th low, and we decline after tomorrow’s report and fill the gap near $1.852, I recommend you take advantage of this buying opportunity. Although I don’t believe it is likely, we could eventually test the March 4^th low near $1.611, but the upside risk of higher prices for unhedged accounts far exceeds the very slight reward potential of holding out, hoping prices will drop from $1.852 to $1.611 per MMbtu.

But if you are risk averse, which by definition hedgers should be, then I don’t recommend you delay hedging, hoping Natural Gas fills the gap at $1.852 cents per kWh. There is no guarantee Natural Gas will fill the gap at $1.852 cents per kWh, and in future reports, I will explain in more detail why supply/demand fundamentals favor much higher prices over the next 12 to 18 months, and hedging your cost of Natural Gas and Electricity near present levels is appropriate for your business. 

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