Approaching Potential Buying Opportunity?

My reports focus on Natural Gas because it is the largest source of energy for the generation of Electricity in

My reports focus on Natural Gas 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 Energy Alert, I warned the characteristics of a major bottom were in place, and since my March 7th Energy Alert, Natural Gas has remained in an uptrend with no major corrections. As you can see in the chart below, Natural Gas has rallied 86%, trading from a low of $1.611 per MMbtu on March 4th to a high of $2.998 on July 1st:

NatGas1In my June 1st Energy Alert, I discussed 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 also 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, which as you can see in the chart below is what has taken place since we reached the March 4th low at $1.611:

NatGas2In the above chart I circled the highs in green and the lows in red, and drew a red line from each high to its correction low. As you can see the corrections have been shallow since reaching the Bull Market low on March 4th.

As I explained in my June 1st Energy Alert, when markets reach major bottoms, most traders don’t believe prices will continue higher; therefore, they hold off buying, hoping prices will again decline. But Bull Markets are unrelenting, and don’t give traders a second chance to buy near the bottom. Pullbacks tend to be shallow and don’t surpass the previous low.

Therefore, after reaching its most recent high of $2.998 on July 1st, the question is, how much lower will Natural Gas go before reaching its next higher low? In the chart below I show 2 potential objectives for the next higher low:

NatGas3The first and most likely potential objective for Natural Gas’s would be a test of this year’s calendar high of $2.495, which we reached on January 8th. Bull Market lows tend to hold above previous import highs; therefore, if you delayed hedging Natural Gas or Electricity hoping for lower prices, I recommend locking in your rates if Natural Gas declines to near $2.50 in the near-term.

Also, it is important to understand you don’t need to catch the exact near-term low for your next hedge to be effective long-term. As I explained in my June 1st Energy Alert, Natural Gas and Electricity rates were likely not near the highest prices in this cycle; therefore, the risk of higher prices greatly surpass the reward of delaying, hoping for slightly lower prices, which is why I recommend locking in your next hedge on any near-term weakness.

Even in the unlikely event Natural Gas reaches the second price objective near $2.20, and tests the higher high of $2.199 reached on Apr 27th, hedges entered near $2.50 will still be effective long-term. I base this on the fact over the last 20 years, the 7 previous times Natural Gas traded near this year’s March 4th low, the average price was always higher the following 12, 24 & 36-months.

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



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