- The market expected a withdrawal of around 51 bcf
- The data came in more bearish than expected
- Price action defies the season
Happy Thanksgiving. In the natural gas market, the price action looks more like we are heading into the spring season than the winter. The price of peak-season January futures fell to $2.50 per MMBtu on November 26 as cold weather was descending on a broad area of the United States for the holiday weekend. The price of January NYMEX futures fell to the lowest level since August 23. The low in August was at $2.475, not far below the most recent low in the energy commodity.
The Energy Information Administration reported its first withdrawal from storage around the US as of November 15. The decline of 94 billion cubic feet last week was more than the market had expected. The EIA inventory data typically comes out on Thursday’s at 10:30 AM EST. However, the week the data release was one day early because of the Thanksgiving holiday.
The United States Natural Gas Fund (UNG) is the ETF product that follows the price of nearby NYMEX natural gas futures on a short-term basis.
The market expected a withdrawal of around 51 bcf
After rising to a high at $2.98 per MMBtu on November 5, the price of January natural gas futures tanked by over 16%, reaching a low at $2.50 the day before the EIA’s most recent inventory data. The market’s consensus for the November 27 release was for around a 51 billion cubic feet withdrawal from stockpiles. The warmer forecasts for the coming weeks caused the market to expect a withdrawal that was around half the size of the previous week. While the market underestimated the size of the decline in stocks for the week of November 15, it overestimated the withdrawal for the latest week.
The data came in more bearish than expected
At noon EST on Wednesday, November 27, the EIA told the natural gas market that stockpiles fell by only 28 bcf for the week ending on November 22.
(Source: EIA)
As the chart illustrates, the 28 bcf drop in stocks took the total amount of natural gas in storage across the US to 3.61 trillion cubic feet. At that level, inventories stand at 17.9% above last year’s level but are still 0.9% below the five-year average for this time of the year.
The data caused disappointment in the natural gas futures market as the price moved back towards the previous day’s low.
(Source: CQG)
The ten-minute chart shows that while the price fell after the latest data release from the EIA, natural gas stopped just short of the November 26 low when the price reached $2.501 per MMBtu. January futures were trading close to that level later in the day, but they had not made a new low.
Price action defies the season
The weather forecasts over the coming days and weeks are the most significant factor when it comes to the path of least resistance of the price of natural gas. The bottom line is that the price action is leaving little or no room for a winter season where the average temperatures are below the norm.
The one thing to always remember when it comes to markets across all asset classes is that the current price of any commodity or other market is always the correct price because it is the level where buyers and sellers meet in a transparent environment. At $2.50 per MMBtu in the January natural gas futures contract, the price action is defying the season. However, it is also telling us that the winter of 2020 could be a year where prices will remain at the lowest level in years. The price of nearby futures has already declined to the lowest level since the winter season since 2015/2016, when the energy commodity fell to $1.611 per MMBtu in March.
It is still possible that we will still see a rally, but the price action could continue to attract selling over the coming weeks and months.
The United States Natural Gas Fund L.P. (UNG) was trading at $19.32 per share on Wednesday afternoon, down $0.12 (-0.62%). Year-to-date, UNG has declined -17.15%, versus a 18.62% 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.