- The market expected a withdrawal of 145 bcf
- The reaction to a larger than expected withdrawal tells a story
- Only eight weeks of winter left
On January 30, the active month March natural gas futures contract reached a low after the EIA reported a larger than expected withdrawal from inventories. The price was just above the $1.80 level, the lowest in twenty-one years during the first month of the year. It has been a winter of discontent for anyone bullish on the natural gas futures market during the peak season of 2019/2020. The price rose to a high of $2.905 on the nearby NYMEX futures contract in early November. The previous year, the high at the start of the peak season for demand was at $4.929 per MMBtu.
The price of natural gas moved steadily lower over the past three months on the back of inventories that have been higher than last year and above the five-year average. Moreover, the weekly withdrawals from stockpiles had been at levels that have encouraged selling in the futures market. The most recent data was not bearish, but the market’s reaction was extremely negative. The United States Natural Gas Fund (UNG) tracks the price of nearby NYMEX natural gas futures.
The market expected a withdrawal of 145 bcf
According to Estimize, the market had projected that the Energy Information Administration would report that stockpiles declined by around 145 billion cubic feet for the week ending on January 24. Before the latest data, the most substantial decline in stocks during the current winter season was 161 bcf.
(Source: EIA)
As the chart highlights, the withdrawal of 201 bcf exceeded the market’s expectations. Stockpiles in storage across the United States stood at 2.746 trillion cubic feet after the latest data, 23.6% above last year’s level, with 7.6% more natural gas in inventories than the five-year average at this time of the year. In the aftermath of the most substantial drawdown in stocks this winter season, the natural gas futures arena ignored what was bullish supply data.
The reaction to a larger than expected withdrawal tells a story
On January 21, the price of natural gas dropped to its lowest level of this year and since 1999, during January, when the March futures contract traded to $1.826.
(Source: CQG)
The ten-minute chart highlights the decline to a new low of $1.815 per MMBtu in the aftermath of the latest EIA natural gas data. Bullish news and a bearish reaction were another confirmation of the overall tone of the natural gas futures market. Trend-following speculative shorts continue to push the price to new and lower lows in a quest to challenge the March 2016 low of $1.611 per MMBtu, the lowest price for the natural gas market since the late 1990s.
Only eight weeks of winter left
We are over halfway through the winter season, which is the peak time of the year for natural gas demand in the United States. At the end of the 2018/2019 withdrawal season, stocks declined to a low of 1.107 tcf. With only eight short weeks to go in this peak season for demand, natural gas inventories would have to drop by an average of 204.9 bcf each week over the next two months. The withdrawal of 201 bcf for the week ending on January 24 was the high for the year, so far. Declines tend to decrease the closer we come to the spring season; stocks are not likely to come anywhere close to last year’s level during the 2019/2020 withdrawal season.
Natural gas seems determined to challenge the March 2016 low at just over the $1.60 per MMBtu level. The bottom in 2016 set up a buying opportunity in the energy commodity. While it is virtually impossible to pick a bottom in markets, risk-reward will eventually favor the upside again. At this time, the natural gas knife continues to fall, shredding any market participant that dips a toe in the market on the long side.
The United States Natural Gas Fund L.P. (UNG) was trading at $14.25 per share on Thursday afternoon, down $0.41 (-2.80%). Year-to-date, UNG has declined -38.89%, versus a 21.90% 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.