Another indication of a top forming can be seen in Elliott Wave patterns for WTI. The move to $112 was not surprising. Indeed, it could be seen as the culmination of a rally that has been developing since April of this year. Elliott Wave, which propounds rallies in five wave sets, suggests the new high fulfills the conditions of a five wave advance. Even if further highs may lie ahead, a consolidation may be in store. Support can be found around $103.
The shape of the forward price curve can often provide guidance for the trader. The forward price curve consists of a chart on which the price of each forward contract is plotted. On Aug. 30, WTI crude oil prices moved sharply lower through the traded months. The nearby contract, October WTI, was worth $107.65. Each subsequent month had a price just lower than the month before. By December, 2020, WTI is worth $79.60.
If, in fact, WTI is nearing a top, a spread trade opportunity may exist. Low prices in the future discourage storage. This would eventually lower crude oil supplies and support prices. One way to trade this would be to sell the relatively overpriced nearby WTI and buy the more distant month. As a spread, this trade enjoys better initial margin requirements set by the exchange.
The effect of new technologies on natural gas production has been well documented. The term “peak oil” seems to be antiquated with today’s robust natural gas industry. And even with prices well below what had been seen to be rock bottom for sustained development; natural gas continues to pick up market share from other fuels and builds a case for sustained export in the years ahead.
According to the EIA, “Proved reserves of U.S. wet natural gas rose by 31.2 trillion cubic feet in 2011 to a new record high of 348.8 trillion cubic feet. Though this increase was lower than the 33.8 trillion cubic feet (Tcf) added in 2010, it was only the second year since 1977 that natural gas net reserves additions surpassed 30 Tcf.”
Natural gas pricing peaked in May 2013, around $4.52. It subsequently moved lower, tracing a channel to $3.15 early in August. A rally over $3.55 would break the down channel, its timing coincident with a seasonal rally.
Natural gas pricing follows well behaved seasonal patterns. This commodity has two seasons and two “shoulders.” The lesser peak is generally found in June, a time leading up to summer’s heat. The greater price peak occurs in December, reflecting, of course, winter’s cold. Prices move down in February from the December peak and remain on that shoulder until April when values rally.
Prices top in June. They consolidate through the summer, starting their run up to December during September. Traders follow these patterns for short-term trades. Powerhouse’s analysis of the seasonal pattern shows the summer peak price nearly five% higher than the annual average price. December’s peak can run more than 10% over the annual average.
The forward price curve is very different from that of WTI crude oil. Nearby prices are relatively low, with the October 2013 contract at $3.58. Prices rally in more future months. By December, 2026, natural gas is worth $6.995.
A trading strategy similar to that suggested for WTI is indicated here. A trader could buy the nearby natural gas contract, selling the more distant month. As time passes, the more distant month should fall to meet current prices and since the current month is already relatively cheap, it has less price room to move adversely.
The steep carry in natural gas prices represents an opportunity for producers. A sale of more distant futures months establishes a price well above current levels in a market that is likely to be well supplied for several years.
Alan H. Levine is CEO of Powerhouse, a company offering the Power of Price Protection. Alan has served the energy industries since 1969 and focused on hedging and price risk management since 1977. He can be reached at alan@powerhouseTL.com