- Natural gas busts through resistance
- It is only mid-September
- Inventories injections are not rising fast- Buy dips not rallies
Last week, the price of natural gas broke through its technical resistance level and moved to the highest price since late May. When Hurricane Dorian was approaching the United States, the price of the energy commodity began to rise, but it continued to make higher highs after the storm did most of its damage in the Bahamas.
Natural gas is one of the most volatile commodities that trade on the futures exchange, and price variance tends to increase as the peak season for demand approaches each year. The peak season runs from mid-November through March when heating demand rises in the United States. Last year, the price exploded in October and November, reaching the highest level since 2014. The recent rally could set the stage for higher prices over the coming weeks and months. However, it may be too early for the energy commodity’s price to run away on the upside. The United States Natural Gas Fund (UNG) is the most liquid unleveraged product that reflects the price action in the natural gas futures market.
Natural gas busts through resistance
After falling to a low at $1.611 per MMBtu in March 2016, the price of natural gas made consecutive higher lows the following two years at the end of the peak season. In February 2017, the price traded to a low at $2.522, and during the same month in 2018, the bottom was at $2.53 per MMBtu. This year, it looked like natural gas was going to add a third year to the pattern as the low in February was at $2.543. However, in April, the price fell through the $2.50 level for the first time since 2016. The technical break sent natural gas futures to a low at $2.029 in early August.
(Source: CQG)
The weekly chart shows that the level of support between the $2.50 and $2.53 level gave way and became resistance for the natural gas futures market. Last week, the price moved through the technical level to a high at $2.648, the highest price since May. The price settled on September 13 at $2.614 per MMBtu, not far below the high for the week.
It is only mid-September
The technical breakout in the volatile natural gas market was a significant event, but it could have come a bit too early. The peak season for demand will begin in mid-November, so there are two months before natural gas moves into winter mode. The price has posted gains in five of the past six weeks. Last November, the price of the energy commodity rose to the highest level since 2014 at $4.929 per MMBtu. The price explosion came on the back of the lowest inventory levels in years and the uncertainty of the weather and demand for heating over the winter months. This year, inventory levels will be higher than last, which means we could see a correction in the price of natural gas before the stocks begin to decline during the withdrawal season.
Inventories injections are not rising fast- Buy dips not rallies
Last week, the Energy Information Administration reported that stockpiles rose by 78 billion cubic feet to 3.019 trillion cubic feet for the week ending on September 6. Stocks only need to rise by an average of 25.4 bcf over the coming nine weeks to reach last year’s peak at 3.247 tcf. However, to reach the four tcf level of past years, an average of 109 bcf is necessary, which is unlikely. Stocks are currently 15% below last year’s level, but still 2.5% below the five-year average for this time of the year.
The natural gas market will be watching the weekly inventory data closely between now and the start of the withdrawal season. In a few weeks, market participants will begin to focus on extended weather forecasts for the beginning of the winter season. We are likely to see lots of volatility on natural gas, and at least one rally to above the $3 per MMBtu level on the nearby NYMEX futures contract before the end of the year. However, it may be too early for the price to reach that level. Buying dips on a scale-down basis could provide optimal results in the natural gas market over the coming weeks. Natural gas is a seasonal commodity, and the peak season is just around the corner, but two months can be a lifetime in the volatile energy commodity.
The United States Natural Gas Fund L.P. (UNG) was trading at $23.15 per share on Tuesday morning, down $0.12 (-0.52%). Year-to-date, UNG has declined -0.73%, versus a 12.93% rise in the benchmark S&P 500 index during the same period.
UNG currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #51 of 109 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
Andrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.