Natural Gas Closing Above $3.00, Signaling Higher Prices Are Ahead?

My reports focus on Natural Gas because it presently is the largest source of energy for the generation of Electricity; therefore, Natural Gas and Electricity rates are highly correlated.

Starting with my March 7th Energy Alert, as shown in the chart below, I have warned Natural Gas has formed a very similar pattern to what we experienced in the spring of 2012, and based on past performance prices likely will go much higher before reaching a final high in this cycle:

In my March 7th Energy Alert, I warned 2 characteristics of a major bottom were in place, which were unsustainably low prices and a high level of negative news. Low prices motivate suppliers to decrease production, which leads to higher prices, and a high level of negative news is already factored into low prices; therefore, rates were primed to move higher!

As you can see in the chart below since my March 7th Energy Alert, Natural Gas has rallied over 90%, trading from a low of $1.611 per MMbtu on March 4^th to a high of $3.098 today:

• In today’s report, I will explain why yesterday’s close above its previous 2016 high of $2.998 per MMbtu, increases the risk of higher prices near-term.

In my June 1st Energy Alert, I addressed another characteristic of major bottoms, which is over time they form a series of higher highs and higher lows; and the declines from the higher highs to the next higher low tend to be shallow.

In the chart below, I trace price declines with red lines, and price increases with green lines coming off the lows after my March 7^th Energy Alert:

As you can see in the above chart, after reaching a major low after my March 7^th Energy Alert, Natural Gas formed a clear pattern of higher highs and higher lows, which leads us to the question I ask in the title of this energy alert.

Does Natural Gas closing above $3.00, signal higher prices are ahead?

I will refer to the chart below to address this question:

As you can see in the above chart, after my March 7^th Energy Alert, Natural Gas rallied sharply from $1.611 per MMbtu shown by the green line to $2.199 per MMbtu on April 27^th, before experiencing a shallow pullback shown by the red line to $1.952 per MMbtu on May 19^th.

After completing the shallow pullback to $1.952 per MMbtu, Natural Gas proceeded to rally shown by the green line, and when it closed above $2.199 per MMbtu, the rally accelerated reaching a new 2016 high of $2.998 per MMbtu on July 1^st. But the rally stalled as it failed to penetrate stiff resistance near $3.00 per MMbtu.

This led to the next shallow pullback shown by the red line reached $2.523 per MMbtu on August 12^th, stopping  just above the support level near $2.50, which I said in my July 20^th Energy Alert, was the first and most likely potential objective for the next shallow pullback.

All this leads us to where we are today. After holding above major support near $2.50 per MMbtu as shown by the green line, Natural Gas proceeded to rally and yesterday closed at $3.047 per MMbtu, thereby penetrating key resistance near $3.00 per MMbtu. Although past performance does not guarantee future results, the close above $3.00 per MMbtu increases the risk of a rally towards next resistance near $3.50 per MMbtu.

In my introduction, I pointed out, after reaching a multiyear low in the Spring of 2012 shown in the chart below, prices moved higher maintaining a pattern of higher highs and higher lows.

Since March 2016, we have formed a similar pattern of higher highs and higher lows; therefore, based on past performance we are likely in the early stages of a long-term Bull Market, and the risk of higher prices exceeds the reward potential of delaying hoping for lower prices.

Therefore, if you have not already hedged your cost of Natural Gas and Electricity, I recommend doing so near present levels. As a hedger your objective should not be to catch the exact bottom, but to reserve a rate lower than the expected average rate over the term of the hedge.

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