The Longer You Delay, The More You Will Likely Pay!

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.

Starting with my March 7th report, I warned 2 characteristics of a major bottom are in place. Unsustainably low prices and a high level of negative news. Unsustainably low prices influence suppliers to decrease production, which leads to higher prices, and a high level of negative news is already factored into low prices and rates are primed to move higher!

As you can see in the chart below since my March 7th Energy Alert, Natural Gas has rallied nearly 50%, trading from a low of $1.611 per MMbtu on March 4^th to a high of $2.386 today:

Also, since my March 7^th Energy Alert, Natural Gas has remained in an uptrend with no major corrections. As I explained in my April 4^th Energy Alert, we may have weakness at times, but the conditions supporting a major bottom are in place.

In today’s report, I will address 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 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.

In my March 7^th Energy Alert, I pointed out in the spring of 2012, the first 2 major characteristics of a major bottom, unsustainably low prices and extremely negative news, were in place. The winter of 2011/12 was one of the warmest in history; therefore, storage levels were at record levels, and due to new fracking technology production increased by the largest amount year over year in history.

Logically you would have thought ending the winter of 2011/12 with the highest storage level in history for that time of the year, and then experiencing the largest increase in production in history the following 12-months would result in lower prices. But as you can see in the chart, prices increased dramatically after briefly trading below $2.00 per MMbtu in the spring of 2012, and formed a classic Bull Market Pattern:

After trading briefly below $2.00 per MMbtu, Natural Gas formed a series of higher highs and higher lows. This is a classic Bull Market pattern, which as you can see in the chart below is being repeated today:

Again, just as in 2012, after reaching its spring low in March, Natural Gas has formed a pattern of higher highs and higher lows. This is classic Bull Market trade action, and if this pattern holds, it is predicting later this year, Natural Gas prices will be significantly higher than today.

I want to make one last point. When a market reaches a major bottom, most traders do not believe prices will continue higher; therefore, they hold off buying, hoping prices will again decline. But Bull Markets are unrelenting, and they don’t give traders a second chance to buy near the bottom. The longer traders delay, the more they will likely pay, which is why we have repeatedly recommended our clients hedge their cost of Natural gas and Electricity ASAP.

Markets are a forecasting mechanism, and after reaching an unsustainably low price, they begin to adjust until reaching an unsustainably higher price. This is especially true for Natural Gas, which historically is one of the most volatile markets traded, and as you can see in the chart below, this is exactly what took place after Natural Gas reached a major bottom in the spring of 2012:

After reaching a major bottom in the spring of 2012, Natural Gas continued to maintain a pattern of higher highs and higher lows, until it finally reached a major top during the extremely cold winter of 2013/2014, and then and only then as shown in red, did Natural Gas break the pattern of higher highs and higher lows, and move lower. This was classic trade action as markets tend to reach bottoms when news is most negative fundamentally, and tops when news is most supportive fundamentally.

Therefore, based on this tendency, Natural Gas and Electricity rates are likely not near the highest prices in this cycle. The highs will be reached on news, which at this time is impossible to anticipate. But one thing is certain, it is not a question of whether there will be news in the future supporting Natural Gas prices, it is only a question of when.

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