Natural Gas: Window of Opportunity to Hedge Cost of Gas & Electricity May Be About to Close – Part 2 In my November 9th Energy Update, I said over the last twenty years, four times Natural Gas rallied into

In my November 9th Energy Update, I said over the last twenty years, four times Natural Gas rallied into the fall from lower prices, and in each case it pulled back prior to rallying to a new high in December.

In those four examples, the fall lows were reached between Oct 31st and Nov 13, therefore, I said we may reach an important low in the first half of November, and Natural Gas is declining towards an important technical indicator that in the past accurately revealed the fall low within a few days.

The technical indicator are Bollinger Bands, which are plotted two standard deviations above and below the 20-day moving average, and often highlight areas of support and resistance. It is also important to note there is a 95% probability prices will remain within two standard deviations from the 20-day moving average.

Therefore, if you believe based on what took place in the past when prices rallied into October before declining in the first half of November, Bollinger Bands are an effective tool for determining the time and price of entry points.

And as you can see, after writing my Nov 9th Energy Update, Natural Gas declined to the lower Bollinger Band on Nov 10th, and after attempting to rally prices fell and reached a new low four days later on Nov 15th, and now is again rallying:  

The question is why did Natural Gas initially fall to the Lower Bollinger Band, and why is time likely running out to hedge Gas and Electricity before prices rally to a new yearly high in December?

I believe prices returned to the lower Bollinger Band to give large hedgers enough time to purchase positions prior to Natural Gas moving higher into December. The longer prices remain close to the lower Bollinger Band, large hedgers are able to purchase more hedgers at low prices.

In 2000, 2002 and 2005 prices remained near the lower Bollinger Band five to seven days before moving to new yearly highs in December. Yesterday was the fourth day near the lower Bollinger Band; therefore, large hedgers have had sufficient time to build their hedge portfolios to protect against the risk of higher prices in December. Therefore, I believe prices will likely begin moving higher this week, and short-term pullbacks are buying opportunities.

As I stated in last weeks’ report, although no technical tool is perfect in predicting the direction of prices, I believe this tool in conjunction with what I wrote in previous reports leads me to believe we will likely reach this year’s fall low this week. And I hope this report helps you appreciate the wisdom of protecting yourself now against the likelihood of higher prices not only near-term, but most importantly long-term.

As I have written in previous reports, this year’s rally was primarily due to the Biden’s administration’s restrictive energy policies and fear of inflation in the U.S., along with a 10-year low in Europe’s Natural Gas supplies caused by their green energy policies, and my concern is the polices leading to today’s high prices are not abating, they are becoming more entrenched here and abroad.

No one knows for sure where Natural Gas and Electricity prices will be over the next 6-months, but three years from now, I believe you will realize there was only one cost of doing business you could have stopped increasing, your cost of energy for Natural Gas and Electricity.

Not every client’s risk tolerance and hedging strategy is the same, but the above report will help you put into perspective the risk/reward opportunities. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Energy Professionals
Senior Commodity Analyst

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