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It is not even Thanksgiving yet
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Stocks are higher this year
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At least one move to $3 on January futures is in the cards
After trading to a high at $2.905 on November 5, the price of natural gas has been falling like a stone even though the winter season is just getting underway in the United States. Last week, the Energy Information reported that inventories of the energy commodity dropped for the first time since March of this year. The decline in stockpiles ushered in the withdrawal season, which is the peak time of demand for natural gas each year.
The withdrawal season will run through March 2020. The average temperatures will determine the demand for heating, how fast stocks drop and how low they go before the start of the 2020 injection season in the spring. With at least four months of cold weather conditions ahead, the decline of the December futures contract to the $2.50 per MMBtu level last week was a bit overdone on the downside for the energy commodity. The United States Natural Gas Fund (UNG) follows the price of nearby natural gas futures on NYMEX higher and lower.
It is not even Thanksgiving yet
The Thanksgiving holiday is this Thursday, which tells us two things about the natural gas market. The first is that it is still too early in the season for the price to ignore the uncertainty of the average temperatures from December through March. The second is that the Energy Information Administration will release its weekly inventory report one day early this week on Wednesday, November 27. As of last Friday, the market was expecting a smaller withdrawal from storage of 40 billion cubic feet compared to last week’s decline of 94 bcf. The price of December natural gas futures on the NYMEX futures exchange settled at $2.665 per MMBtu on November 22 as it recovered from the low of last week at $2.501 on November 19. The price action on the downside was premature, considering the time of the year, but it could have been a reaction to the total level of stockpiles.
Stocks are higher this year
At the end of the 2019 injection season, natural gas stocks reached a high of 3.732 trillion cubic feet. The level was 485 bcf or 14.9% above last year’s peak. The low level of inventories going into the winter season in late 2018 took the price of the nearby futures to a high at $4.929 per MMBtu. This year, there is far more natural gas available to meet winter requirements, but stocks were still below the record high levels at over four trillion cubic feet seen in 2015 and 2016.
One of the factors that could be weighing on the price of the energy commodity is a technical formation that developed on the daily and weekly natural gas charts that I highlighted in recent articles.
(Source: CQG)
The chart of December futures shows that the island reversal pattern between $2.738 and $2.753 was still present at the end of last week. The same pattern exists on the weekly chart. However, the price momentum indicator crossed higher in oversold territory late last week, and relative strength rose above a neutral reading at the same time, daily historical volatility at over 46.50% is at a new high. The technical metrics could be telling us that the price action will fill the void and eliminate the island reversal pattern sooner rather than later.
At least one move to $3 on January futures is in the cards
I am looking for a move to the $3 level or higher on the January natural gas futures contract. On November 22, the peak season contract was at the $2.70 level, meaning it could have at least 11% upside potential over the coming days and weeks. A move that fills the gaps on the island reversal could trigger buying and a move to the target on the upside.
As of the end of last week, the market had not yet sat down for Thanksgiving dinner. It was just too early in the peak season for demand for the price of natural gas to fall to $2.50 per MMBtu on the winter contracts. I continue to believe that seasonality limits the downside in the natural gas futures market. Mother Nature and her decision on temperatures across the US will be the leading factor over the coming weeks when it comes to the path of least resistance of the price of the energy commodity. While higher inventories this year will limit the upside potential, $3 remains an achievable target on the upside.
The United States Natural Gas Fund L.P. (UNG) was trading at $19.30 per share on Tuesday morning, down $0.53 (-2.67%). Year-to-date, UNG has declined -17.24%, versus a 17.99% 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.