In February 2014, natural gas prices hit $6.15, since then they have dropped nearly consistently. It’s possible that April 2015 saw prices bottom out at $2.49, but September saw prices hovering at $2.70 with no indication of a recovery.
So what’s responsible for this?
Natural gas supplies are at near record levels and 2015 production in the US is at an all time high, despite the drop in prices. The EIA is predicting an increase of 5.4% in 2015 over the previous year. Also, the discovery of a ‘supergiant’ gas field in the Mediterranean by Eni, as well as other exploration finds offer a promising picture of long-term supply.
Historical precedent can be a helpful tool, especially during times like this, but most traders lack the tools needed for effective analysis and frequently look to similar drops in the past. This approach is to fall back on, but is flawed.
These charts each show a three-month price increase. However, most investors looking at scenario 1 would be inclined to sell, while those looking at scenario 5 would be inclined to hold. This example may be a bit oversimplified, but is a powerful illustration of how trading patterns can influence future actions.
With this in mind, how can a trader find historical situations that reflect the course of the current pattern more accurately? EidoSearch searches historical data and analyzes approximately 100 billion patterns a minute to find specific numerical pattern.
Let’s take a look natural gas. Taking the price trend for the past year, EidoSearch found eight matches from the past 30 years, the most statistically similar being the year from September 2005 to September 2006. The chart below shows the current trend in blue, and the ‘05-’06 match in black.
In 2005, natural gas came off an all-time high, while several factors resulted in lower demand through 2006. Some of these factors included mild temperatures, resulting in lower demand for heat in Q1 and Q4, higher on-shore production, higher than average storage supplies, and recovery from 2005 hurricanes Katrina and Rita which devastated Louisiana and surrounding areas. Current on-shore production and supplies bear similarities to that period.
All of the similar patterns suggest an average return in the next year of 52.7%. Seven of those eight occurrences showed increases of at least 27.4%.
No historical precedent suggests that natural gas prices will continue to drop over the coming year. Such objective benchmarks can be a powerful tool for any investor.
[Credits of the photo used for the featured image: “Orvis State natural gas flare 02 – Evanson Place – Arnegard North Dakota – 2013-07-04” by Tim Evanson, used under CC BY-SA / Color filters added, image cropped]