UPDATE: to the November 3rd, 2015 Energy Alert

Oct 2015 and Apr 2012 Capitulation Lows Very Similar!

In my Nov 3^rd Energy Alert, I said capitulation lows are reached when investors simply give up. This happens when investors either no longer believe in their position or in some instances are forced to sell because their contract is about to expire.

I said the Natural Gas low of $1.948 per MMbtu the day before expiration on Oct 27^th was the result of both factors coming into play, and the recent collapse in Natural Gas was an excellent opportunity to enter new hedges and extend hedges already in place.

I also explained the bearish factors discussed in my report were already factored into the price of Natural Gas, and based on the bullish factors discussed in my report today’s low pricing will be short lived and will usher in much higher pricing in the years to come.

• In this update, I will point out how similar the 15 year low in April 2012 was to the capitulation low we recently reached on the day before expiration on Oct 27^th.

Below is a today’s daily chart of the nearby contract of Natural Gas:

Note the gap created on expiration of the nearby contract on Oct 28^th. Also, note today’s trade action, Natural Gas is up today even though the EIA announced this morning supplies increased 53 Bcf to 3,929 Bcf, which matches the all-time high reached in Nov 2012.

The question is where will Natural Gas go from here?

The answer might be found by looking at the chart below, which shows what took place the last time we reached a capitulation low near the same price level in April 2012:

As you can see in the above chart a gap was also created on expiration day of Natural Gas’s nearby contract, and proceeded to trade higher throughout 2012.

The low in April 2012 was reached after the warmest winter in 100 years led to the largest storage surplus of Natural Gas in history. Just as today the fundamental news could not have been worse, and yet, Natural Gas rallied after the April 2012 low. This took place despite new fracking technology increasing production to an unprecedented pace leading to a record level of storage in Nov 2012

I also want to mention in most instances gaps are eventually filled, and the gap in the above chart was in fact filled after 42 months when Natural Gas recently plunged near the expiration of the nearby contract. No one can absolutely predict the future, but if we do not learn from history, we are destined to make the same mistakes.

Based on the above factors we may find in the fullness of time the lows near the end of Oct 2015 will not be reached again for many years, which is why I stated in my opening today’s low pricing will be short lived and usher in much higher pricing in the years to come.

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