Natural Gas Inverted Head & Shoulders Pattern Forecasting Higher Prices?

(My reports focus on Natural Gas as it is now the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)

In today’s report, I discuss why the inverted head & shoulders pattern Natural Gas formed over the last 4-months increases the risk of higher prices and should be considered if you have not already hedged your cost of Natural Gas or Electricity.

In my July 27^th Energy Alert, I explained why Natural Gas prices consolidated over the previous 2 months and why it was a harbinger of increased volatility, and why the upside risk of higher Natural Gas prices far exceeded the downside reward potential of lower prices.

Below is the chart of Natural Gas contained in the July 27^th Energy Alert:

After writing the July 27^th Energy Alert, mild weather was forecasted for August, and Natural Gas declined briefly below the Consolidation Pattern formed the previous 2 months:

But as you can see in the above chart, after briefly declining in early August, Natural Gas rallied and has formed an inverted head and shoulders pattern.

The left shoulder was the consolidation pattern discussed in my July 27^th Energy Alert, prior to briefly declining in early August to form the head shown in red, and as discussed in my August 28^th Energy Alert, prices rallied and has been consolidating to form the right shoulder shown above, and based on the factors delineated in my July 27^th Energy Alert, the upside risk of higher Natural Gas prices far exceeds the downside reward potential of lower prices.

In this context, I will now explain why the inverted head & shoulders pattern Natural Gas formed over the last 4-months increases the risk of higher prices and should be considered if you have not already hedged your cost of Natural Gas or Electricity.

Head & shoulders patterns are one of the most reliable chart patterns in technical analysis, and as implied by the name, the patterns look like a head with two shoulders. The pattern can occur at a top and signal a market is about to fall, or a head & shoulder bottom (also known as inverse head and shoulders), signals that a market is about to rise near-term. Head & shoulders patterns are not correct 100% of the time, but given all the factors discussed in my July 27^th and August 28^th Energy Alerts, the risk of higher prices this winter is significant and should not be ignored.

Also, it is important to note, in mid-September, hurricane Irma adversely effected Natural Gas demand in the Southeast, but Natural Gas prices remained within the right shoulder consolidation pattern. When a market does not decline despite negative news, it is signaling the path of least resistance is for higher prices. Therefore, in the short-term, where are Natural Gas prices likely going?

The chart below shows a possible near-term objective near $3.45 per MMbtu:

In my March 1^st, 2017 Energy Alert, I explained extremely mild weather in January was followed by an extraordinarily mild February, the mildest since 1970, which led to a short-term break in prices. The combination of structural supply/demand imbalances in conjunction with a sharp correction caused by unexpected prolonged mild weather presented hedgers with an excellent buying opportunity. As you can see in the above chart, Natural Gas prices held at an anticipated support level near $2.50 per MMbtu, and rallied to $3.45 per MMbtu. A conservative objective now, is a retest of the spring high of $3.45 per MMbtu, and if achieved we will reevaluate the market at that time.

Conclusions:

Although the inverted head & shoulders pattern Natural Gas formed over the last 4-months, does not guarantee rates are heading higher near-term, it is one of the most reliable technical indicators, and along with the factors discussed in my July 27^th and August 28^th Energy Alerts, increases the probability rates will increase above present levels.

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 now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
North American Energy Advisory
Senior Commodity Analyst