- Quarterly historical volatility in natural gas is near a record low
- 2020 is looking a lot like 2016 in the natural gas futures market
- Short that overstay their welcome could eventually feel pain
Natural gas is a combustible energy commodity in its natural form. The price action in the natural gas futures market can be as volatile as the commodity. Since natural gas futures began trading on the New York Mercantile Exchange division of the Chicago Mercantile Exchange in 1990, the price has traded from a low of $1.02 to a high of $15.65 per MMBtu. Natural gas can double or halve in price over short periods. The most recent example came in 2018 when nearby futures rose from a low of $2.53 to a high of $4.929 per MMBtu. After reaching that peak in November, the price was back below the $3 level the next month.
Since the start of the demand season in 2019, natural gas moved steadily lower. The nearby futures contract rose to a lower high at $2.905 in early November. Higher stockpile levels in 2019 compared to 2018 prevented the energy commodity from reaching the $3 per MMBtu level. Meanwhile, in January, the price slipped below the $2 level for the first time since 2016. The target on the downside now stands at the 2016 low of $1.611, which was the lowest price for the energy commodity since the late 1990s.
The United States Natural Gas Fund (UNG) is the ETF product that follows the price of natural gas higher and lower. The current price action could set up a compelling buying opportunity in the coming months.
Quarterly historical volatility in natural gas is near a record low
Market participants involved in the natural gas future arena over the past three decades know that the energy commodity has a long history of wild price swings that cause high volatility readings.
(Source: CQG)
The chart shows that quarterly historical volatility in the natural gas futures market has ranged from a low of 12.03% to a high of 80.24%. At 13.67% at the end of last week, the measure of price variance is not far off the low. Moreover, volatility tends to peak each year during the winter season. During the 2019/2020 withdrawal season, when stockpiles fall because of high demand, the metric is sitting near its bottom.
2020 is looking a lot like 2016 in the natural gas futures market
The last time the price action was this bearish in the natural gas futures arena was back in early 2016 when the price was on its way to a low of $1.611.
(Source: CQG)
As the circled periods on the monthly chart shows, the trend in early 2020 is eerily similar to the pattern that led to the 2016 bottom. In 2016, the price of the energy commodity fell to its lowest price of the century. Last week, the low of $1.83 per MMBtu was the lowest level since January since 1999. The low during January 2016 was at $2.044 per MMBtu.
Short that overstay their welcome could eventually feel pain
History tends to repeat, and technical and trend-following traders in then natural gas futures market are licking their chops over the prospects for lower prices over the coming weeks and months. Natural gas tends to hit its annual low in March when the withdrawal season ends with winter, and supplies begin following into storage and inventories rise.
A challenge of the March 2016 low seems to be on the horizon, and we could even see the price decline below the 1998 bottom at $1.61, which is a long-term support level.
(Source: CQG)
The weekly chart shows that the open interest metric rose from 1.16 million to around 1.50 million contracts since early November as the price declined. Falling price and increasing open interest tend to be a technical validation of a bearish trend in a futures market. The increase in the total number of open long and short positions is at least partially the result of a rise in the number of speculative short positions.
From a risk-reward perspective, the risk of a short position will rise; the lower the price falls over the coming weeks. Natural gas has a long history of surprise price moves that punish longs or shorts that become overly confident when it comes to the market’s direction. One clue that a recovery will eventually occur is that the volatility measure on the long-term chart is far too low at its current level.
The United States Natural Gas Fund L.P. (UNG) was trading at $14.83 per share on Monday afternoon, up $0.22 (+1.51%). Year-to-date, UNG has declined -36.41%, versus a 22.23% 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.