- The middle of the winter season
- The futures market is oversold
- Sellers lurking above in natural gas
It has been nothing short of a winter of discontent for the bulls in the natural gas futures market. As the withdrawal season approached in early November, the uncertainty of the average temperatures during the winter season caused the price of nearby futures to rise to a high of $2.905 during the first week of November. During the same time in 2018, the price rose to a peak of $4.929 per MMBtu.
The far higher level of stockpiles heading into the winter season caused the November 2019 rally to stop short of the $3 level. At the end of the injection season in 2018, stockpiles peaked at 3.247 trillion cubic feet. In 2019, the high was 485 billion cubic feet higher at 3.732 tcf. The high level of inventories and warm temperatures took the price of natural gas to a low of $1.83 on January 21, the lowest price since 2016 at this time of the year.
The natural gas futures market fell into oversold territory below the $2.00 per MMBtu level. Last week, another attempt at a recovery led to a bearish reversal on the weekly chart, and the price action followed through on the downside. The United States Natural Gas Fund (UNG) tracks the price of nearby futures that trade on the NYMEX division of the CME.
The middle of the winter season
Mid-January marks the midpoint of the peak season for demand of natural gas and the time of the year where stockpiles decline runs from November through March. The price action in the natural gas market has been bearish since the very start of the 2019/2020 withdrawal season.
(Source: CQG)
As the daily chart highlights, the price of nearby February futures on NYMEX declined from a high of $2.926 on November 5 to a low of $1.83 per MMBtu on January 21, the price action has become a falling knife in the energy commodity.
The futures market is oversold
The trend in the natural gas futures market remains bearish as the 2020 injection season is now on the horizon.
(Source: CQG)
The monthly chart illustrates that price momentum and relative strength indicators were in oversold territory on January 21. Monthly historical volatility at 26.5% is at a low level as the decline in price had been slow and steady until the beginning of this week. Meanwhile, the total number of open long and short positions in the natural gas future market has climbed as the price fell, reaching its latest high at over 1.511 million contracts last week. At the highest level since late 2018, rising open interest while the price is under selling pressure is typically a validation of a bearish price trend in a futures market.
The oversold position of the natural gas market could lead to a price recovery, but each time the energy commodity picks its head up, selling returns to the market.
Sellers lurking above in natural gas
The daily chart shows that natural gas attempted to rally after trading to a low of $2.083 on January 3. The price edged higher, reaching a peak of $2.255 on January 14, but it ran out of steam on the upside before a rally to challenge the first level of technical resistance at $2.29, the December 26 high.
(Source: CQG)
The weekly chart shows the energy commodity wound up putting in a bearish reversal on the weekly chart last week. The follow through selling created a gap from $1.97 to $1.994. The recent price action is a sign that sellers are likely to become more aggressive on any rallies. Inventories that are around 19.4% over last year’s level, and over 5% above the five-year average, warm average temperatures, and only ten weeks left before natural gas begins flowing into storage and inventories rise, are likely to continue to keep the pressure on the price of the energy commodity. The rising number of speculative shorts likely pushed the price below $1.90. The March 2016 low at $1.611 per MMBtu is now the target on the downside. Another move to the lowest price level since the late 1990s looks like it is in the cards for the volatile energy commodity.
Given the oversold condition in the futures arena, I would not be surprised to see natural gas attempt another recovery rally. However, all of the technical and fundamental data is telling us that any price appreciation would create a selling opportunity for the coming weeks and months.
The United States Natural Gas Fund L.P. (UNG) was trading at $14.94 per share on Wednesday morning, up $0.07 (+0.47%). Year-to-date, UNG has declined -35.93%, versus a 25.18% 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.