Third and Final Near-Term Hedging Opportunity

If you have followed our Energy Alerts since 4/6/13, you are aware we predicted a window of opportunity would start in 30-45 day in which our clients could capitalize on a short-term pullback. We also stated it would be important to take advantage of this buying opportunity because we believed energy supply rates were poised to go much higher in the second half of 2013.

In our 5/10/13 Energy Alert, we pointed out the anticipated pullback of Natural Gas and electricity prices had begun, and the question was how deep and long would the correction be. We described what we believed were the 3 most likely scenarios along with a risk assessment of each scenario. The first two scenarios have been completed and clients who took advantage of the first two hedging opportunities are well positioned for what we believe lies ahead.

In our 6/7/13 Energy Alert, we stated the third scenario discussed in our 4/6/13 Energy Alert might still take place prior to the completion of the spring pullback in natural gas and electricity. We said this scenario would be completed with a test of the 200-Day Moving Average, and it was the most likely of the three scenarios. We also advised clients not to wait for this scenario because the risk/reward ratio did not favor trying to nail the exact bottom of the anticipated spring correction.

But with that being said, if you did not take advantage of the first two hedging opportunities we strongly recommend you take advantage of this third, and likely last, hedge opportunity at slightly lower prices than the first two hedges and significantly below where we believe hedge pricing will be in the second half of 2013 and beyond.

Below is a chart of Natural Gas after close, today, June 21, 2013.

As you can see we are very close to the completion of Scenario 3.

The 200-Day Moving Average is the long-term indicator of trend. We believe the long-term trend favors higher prices. We believe the 10-year low reached in the spring of 2012 was the end of a four-year bear market, and we are in the early stages of a long-term bull market similar to the bull market of 2002 to 2008. Long-term trend followers utilize pullbacks to the 200-day moving average as hedging opportunities. On our Historical Data page (click here), you will see Natural Gas and Electricity prices from a cyclical and historical perspective. After reading this material you will understand why, based on present cyclical and historical price patterns, we believe we are in the early stages of a long-term bull market and the upside risk in prices is substantial at this time.

Every client’s risk tolerance and hedging strategy is not the same, but we hope the above information has given you a better understanding of the market risk at this time. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your specific situation.

Ray Franklin
Senior Energy Analyst