Expect the Unexpected in the Natural Gas Futures Market

• The market expected a 64 bcf injection
• Natural gas flirts with $2 per MMBtu and fails, for now
• Expect the unexpected in the natural gas futures market

From November 2019 through the end of March, the natural gas futures market made lower highs and lower lows. After failing at $2.905 per MMBtu in late 2019, the price of the nearby natural gas futures contract on NYMEX fell to a twenty-five-year low at $1.519 in late March 2020.

The bearish price action in the natural gas market, together with seasonal factors, caused deferred futures contract prices to be higher than nearby prices in late March. Therefore, the active month June futures reached its bottom at $1.649 per MMBtu on April 2, which now stands as technical support for the energy commodity.

The energy sector had a rough month in April as price carnage in the crude oil market took the price of nearby NYMEX futures to an incredible low of negative $40.32 per barrel on April 20. Natural gas had a mind of its own at that time as the price of June futures reached a peak of $2.10.  On Thursday, April 30, the Energy Information Administration reported the level of stockpiles of natural gas in storage across the US for the week ending on April 24. The United States Natural Gas Fund (UNG) moves higher and lower with the price of nearby natural gas futures on NYMEX.

The market expected a 64 bcf injection

On April 20, the consensus forecast for the natural gas injection was around the 64 billion cubic feet level, according to the Estimize website.

(Source: EIA)

As the chart highlights, the EIA reported a marginally higher injection of 70 bcf for the week ending on April 24. Total stockpiles stood at 2.21 trillion cubic feet, 54.9% above last year’s level, and 19.5% higher than the five-year average for this time of the year. The percentage above last year and the five-year average stock levels have been trending slightly lower over the past weeks in a sign that the flow of natural gas into storage is declining. 

Natural gas flirts with $2 per MMBtu and fails, for now

Since reaching a low of $1.649 on April 2, the natural gas futures market has been making higher lows and higher highs. The most recent peak came on April 21 when the price reached $2.10 per MMBtu. While crude oil had the ugliest April in history, natural as shifted from a five-month-long bearish trend to a recovery.

(Source: CQG)

The daily chart of June futures illustrates the change in the trading pattern since early April. The price flirted with the $2 level, but failed, and was at just below $1.90 per MMBtu on April 30 after the release of the latest inventory data. Price momentum and relative strength indicators were in neutral territory. The total number of open long and short positions ranged between 1.186 and 1.258 million throughout April and was at the 1.207 level on April 29, below the midpoint of the period. The lower level of open interest is a sign of a decline in speculative activity. Meanwhile, daily historical volatility at over 65% is at an elevated level, which reflects the wide daily trading ranges. However, daily historical volatility in NYMEX crude oil was at the 300% level on April 30, so natural gas price variance is tame compared to the other energy commodity.

Expect the unexpected in the natural gas futures market

Market participants will be watching the flow of natural gas into storage over the coming weeks and months. While the level of stockpiles started the injection season with 879 bcf above last year’s level, the injections are likely to be far slower this year compared to last. The low price combined with economic troubles at gas producers and social distancing guidelines could create some surprises when it comes to the supply and demand side of the fundamental equation for natural gas.

Natural gas has a long history as one of the most volatile commodities that trade in the futures arena. It is wise to always prepare for surprises from natural gas. The price rose to its highest level since early March on the day that crude oil fell to under negative $40 per barrel, which is another in a long series of historical examples of how natural gas delivers unexpected moves more often than not.

(Source: CQG)

As the weekly chart shows, keep an eye on the $1.974 per MMBtu level on the June futures on Friday, May 1. A close above that level would put in a bullish reversal trading pattern on the weekly chart.

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The United States Natural Gas Fund L.P. (UNG) was trading at $13.13 per share on Thursday afternoon, up $0.13 (+1.00%). Year-to-date, UNG has declined -43.70%, versus a 8.79% 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 110 ETFs in the Commodity ETFs category.