- The market expected a 133 bcf withdrawal
- Failure at $2 leads to another new low
- A March or April bottom in the energy commodity is on the horizon
Risk-off conditions in markets across all asset classes on the back of the spread of Coronavirus caused lots of volatility over the past sessions. Meanwhile, the natural gas futures arena remained calm for a while. After falling to a lower low at $1.753 on February 11, and probing above $2 per MMBtu last week, downside pressure returned to the market. The March futures are rolling to April, but the widow-maker spread was tame. April was trading at around a marginal one-cent premium to the expiring March contract as it rolled off the board.
On Thursday, February 27, the Energy Information Administration released its weekly inventory data. The amount of natural gas stocks in storage around the United States remained at an elevated level compared to last year and the five-year average as of February 21. With only four weeks to go until the stockpiles begin to rise at the end of the winter season, we are coming up to a time of the year when the energy commodity often makes a seasonal low. The United States Natural Gas ETF product (UNG) replicates the price action in the futures arena on a short-term basis.
The market expected a 133 bcf withdrawal
According to Estimize.com, the market had anticipated around a 133 billion cubic feet withdrawal from storage around the United States for the week ending on Friday, February 21.
(Source: EIA)
As the chart shows, the inventory data came in slightly above that level at a withdrawal of 143 bcf. Total stocks in storage fell to a nice round number at exactly 2.2 trillion cubic feet, which was 40.8% above last year’s level and 8.9% over the average level over the previous five years.
Failure at $2 leads to another new low
The weekly chart shows that natural gas made a low at $1.753 per MMBtu on February 11 and staged a recovery rally.
(Source: CQG)
The weekly chart illustrates the price briefly probed above the $2 per MMBtu level on February 20, reaching a peak of $2.025. If you blinked, you missed the price above two bucks as the energy commodity spent around one hour over the psychological level.
One week later, the price fell to a new and lower low for the winter season of 2019/2020. Even though the withdrawal data came in slightly above the market’s expectations for the end of last week, the price fell in the immediate aftermath of the release.
(Source: CQG)
The ten-minute chart shows the steady decline to a low of $1.719 per MMBtu on the active month April contract following the release of the latest EIA data.
A March or April bottom in the energy commodity is on the horizon
With only four short weeks to go in the peak season for natural gas demand, stockpiles will move into the injection season when they build at a significantly high level this year than last. In March 2019, stocks declined to a low of 1.107 tcf. An average decline over the next four weeks of 273.3 bcf would take the inventories to last year’s level. Considering that the most significant inventory withdrawal during this winter season was at 201 bcf, stocks will move nowhere near last year’s low before they begin to rise to higher levels in late March and April and continue to build until November. With stocks ending the peak season at a high level, we could see the inventories swell to over four trillion cubic feet by the start of the 2020/2021 winter season.
When it comes to the path of least resistance of the price of natural gas, the March 2016 low at $1.611 is a bullseye for the market. On February 27, the price fell to a level that was only 10.8 cents above that level on the active month April futures contract.
The March 2016 low was only one tick or 0.001 cents above the 1998 bottom in the energy commodity. The price action after the attempt at a recovery, level of inventories, and time of the year are telling us that we could see a $1.50 handle, or even lower, in natural gas before it finally establishes a bottom sometime in March or April.
The United States Natural Gas Fund L.P. (UNG) was trading at $13.41 per share on Thursday afternoon, down $0.68 (-4.83%). Year-to-date, UNG has declined -42.50%, versus a 15.67% 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.