- The bearish pattern attempts to fade into history
- Lower production will support the price of natural gas
- Levels to watch on the upside over the coming weeks and months
In November 2019, at the beginning of the peak season for demand in the natural gas market, the price of the nearby NYMEX futures contract traded to a high of $2.905 per MMBtu. The price was considerably lower than in November 2018 when natural gas peaked at $4.929 per MMBtu because stockpiles in storage across the US were 498 billion cubic feet above the previous year.
Natural gas is a seasonal commodity, and the price tends to peak at the start of the winter season. Stockpiles move lower during the coldest months of the year as the demand for heating rises. In a typical year, the price of natural gas tends to find a bottom at the end of the winter season, and there are signs that natural gas reached its nadir in late March when the price traded to a twenty-five-year low of $1.519 per MMBtu. In April, the pattern of lower highs and lower lows appears to have ended as natural gas has been leaning higher over the past weeks. The United States Natural Gas Fund (UNG) tracks the price action in the natural gas futures market.
The bearish pattern attempts to fade into history
In November 2019, natural gas began to make lower highs and lower lows in a pattern that remained in place until late March.
(Source: CQG)
The weekly chart highlights the move from $2.905 in late 2019 to a low of $1.519 during the week of March 23. Since then, natural gas has posted gains in six weeks out of the past seven.
(Source: CQG)
The daily chart of the active month June futures shows that the low was at $1.649 per MMBtu on April 2. Throughout April, June futures have been trading in a range between $1.70 and $2.10 per MMBtu. Price momentum and relative strength indicators were near neutral readings as the price settled at $1.89 on Friday, May 1. Open interest at 1.21 million contracts was slightly below its level last year at this time when it stood at 1.24 million. Meanwhile, daily historical volatility at almost 66% was at nearly the highest in 2020. The measure of daily price variance peaked at 79% on April 21.
The bearish price pattern in natural gas ended in March and April. The $1.765 level on June futures is now the first level on the downside when it comes to technical support for the June contract. If natural gas future remains above that level, it will keep the current bullish trend intact.
Lower production will support the price of natural gas
The price action in oil and gas and the global pandemic that has weighed on energy prices has caused financial woes for energy producers. In the current environment, the weaker producers face bankruptcy, and even the stronger members of the sector have experienced severe earnings pressure. With inventories of oil and gas significantly higher than last year at this time and the longer-term averages, production will decline. The latest data from Baker Hughes shows that the number of oil and gas rigs operating in the US and North America has dropped.
(Source: Baker Hughes)
The latest rig count data shows that the number of oil and gas rigs operating in the US dropped by 482 and 102, respectively, compared to last year at this time. Fewer rigs in operation will lead to lower production in both oil and gas. When it comes to the natural gas market, the flow of the energy commodity into storage over the injection season should slow significantly. Fewer than half the number of rigs are now in operation compared to this time in 2019.
The lower output should eventually translate to stable to higher prices in the natural gas futures market.
Levels to watch on the upside over the coming weeks and months
The first level to watch on the weekly chart is the mid-February high of $2.025 per MMBtu.
(Source: CQG)
As the chart shows, the continuous contract only made it to a high of $2.016. A move above $2.025 could lead to a technical rally that takes natural gas to the $2.25 and $2.50 per MMBtu levels where there is technical price congestion. The June futures contract already traded to a high of $2.10, but that was before the expiration of May futures.
On the downside, the first level of support is at $1.765. Below there, $1.705 and $1.649 are levels for June futures, but the critical level stands at the twenty-five-year low of $1.519 per MMBtu. The shift from a bearish to a bullish trading pattern in natural gas in April could lead to higher prices over the coming weeks and months. I do not expect the price to run away on the upside but buying on dips and taking profits on rallies could be the optimal approach to the energy commodity over the coming weeks and months. The trend is always your best friend in futures markets.
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The United States Natural Gas Fund L.P. (UNG) was trading at $14.81 per share on Tuesday morning, up $1.03 (+7.47%). Year-to-date, UNG has declined -36.49%, versus a 8.63% rise in the benchmark S&P 500 index during the same period.
UNG currently has an ETF Daily News SMART Grade of F (Strong Sell), and is ranked #66 of 112 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…