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Seasonality takes the price higher
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The injection season is ending
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The risk of a long position rises with the price of the energy commodity
Natural gas is a volatile fuel in its physical form, and the price action in the futures market can be equally combustible at times. Periodic price explosions and impositions are the reason why speculators flock to natural gas. Price volatility creates a paradise of opportunity for nimble traders with their fingers on the pulse of markets.
Natural gas is now entering what is typically the time of the year with the highest degree of price variance. In November 2018, the lowest level of inventories in years, cold weather at the start of the winter season, and uncertainty over the average temperatures during the winter months combined to send the price to the highest level since 2014. Natural gas futures ran out of buying at just shy of $5 per MMBtu last year at this time. By August, the price dropped to its lowest level since 2016 when it traded to just over $2 per MMBtu.
Each year is always a new adventure in the volatile energy commodity, and the price action over the recent weeks reflects the uncertainty of demand during the coming winter months. The United States Natural Gas Fund (UNG) follows the price of natural gas higher and lower. The triple leveraged UGAZ and DGAZ ETN products attract lots of volume because they magnify the price action in the market that already exhibits a high degree of variance. We are likely to see more market participants flock to the natural gas arena over the coming weeks as we enter the peak season of demand in the United States. Recently, the price action has not disappointed those looking for broader trading ranges.
Seasonality takes the price higher
Seasonality is a powerful force in commodity markets. In the grain markets, prices tend to rise during the spring and early summer as the uncertainty of crop peaks when seeds go into the ground. In gasoline futures, prices often rise in the spring as the summer driving season increases demand for the fuel. In animal protein futures markets, prices typically move higher during the spring as the summer grilling season approaches. In natural gas, the shift from the injection to the withdrawal season tends to be a powerful bullish force during November. The uncertainty of the average temperatures during the winter months determines the demand for heating and natural gas each year during the peak season.
The injection season is ending
In mid-October, the natural gas futures market fell to a higher low at $2.187 per MMBtu. Since then, the price has taken off on the upside.
(Source: CQG)
The weekly chart highlights that the price rose from the mid-October low to a high at $2.905 per MMBtu last week and settled at just under the $2.80 level at the end of last week. Last year at this time, the price was on its way to a high at $4.929 per MMBtu during the week of November 12. In 2018, the October low was at $3.001 per MMBtu; at the peak, the energy commodity had gained 64.25%. A similar percentage move this year would take the price to above the $3.50 per MMBtu level before the start for the winter season.
Last week, the EIA reported an injection of 54 bcf into storage as of the week ending on November 1. Injections will end soon, and the weather conditions across the US will determine the pace of withdrawals between mid-November and March. Natural gas left a small gap on the daily and weekly charts between $2.738 and $2.753 per MMBtu. In futures markets, price action typically fills voids on charts.
The risk of a long position rises with the price of the energy commodity
While natural gas price rose to a high at $4.929 in mid-November 2018, it came down as fast as it moved to the upside. By the end of December, the price was back under $3, and the energy commodity declined over seven consecutive months leading to the low at $2.029 per MMBtu in August.
The risk of a long position in natural gas will rise dramatically with the price of the energy commodity. While I continue to be bullish because of the uncertainty of the coming winter months, I will not forget to take profits on long positions on a scale-up basis.
Natural gas had a big week at the start of November. We should expect volatility to continue during what is always the busiest season of the year for the futures market.
The United States Natural Gas Fund L.P. (UNG) was trading at $20.77 per share on Tuesday morning, down $0.06 (-0.29%). Year-to-date, UNG has declined -10.93%, versus a 16.53% 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.