Will Natural Gas Continue to Rally?

• The market expected a 40 bcf injection into inventories
• Natural gas backs off
• Fourteen weeks to go until the withdrawal season and stocks remain high

After reaching a high of $2.284 on August 6, September natural gas futures were trading between the $2.085 level, and the recent peak as the energy commodity has been consolidating the gain. The end of the injection season when stockpiles rise will end in November. Inventories have been running at significantly higher levels than last year and the five-year average.

Meanwhile, the short-term price pattern in the natural gas futures market has been bullish since late June. Natural gas fell to its lowest price level since 1995 in late June when the price reached $1.432 per MMBtu. The low in the active month September contract was $1.583 on June 26.

On Thursday, August 13, the Energy Information Administration reported the latest injection into storage across the United States as of August 7. The United States Natural Gas Fund (UNG) moves higher and lower with the price of the NYMEX futures. The BOIL and KOLD double leveraged products provide a turbocharged performance on the up and downside.

The market expected a 40 bcf injection into inventories

The injection data on August 13 came in above the consensus projection on Estimize at 40 billion cubic feet.

Source: EIA

As the chart shows, the latest build in natural gas inventories came in at 58 bcf pushing total stockpiles to 3.332 trillion cubic feet for the week ending on August 7. While the percentage above last year’s level dropped slightly from the previous week, there is still 22.3% more natural gas this year compared to this time in 2019. Stocks were 15.3% above the five-year average for the period.

Natural gas backs off

After reaching a high of $2.284 on August 6, the price of natural gas has drifted lower.

Source: CQG

As the chart illustrates, natural gas has traded in a twenty cents range since August 6. If the trading pattern over the past month holds, we could expect another journey below the $2 per MMBtu level on the nearby September futures contract. Price momentum and relative strength indicators were threatening to turn lower from readings above neutral territory. Daily historical volatility at 86.9% was slightly lower than the recent peak at over 91%. Meanwhile, the total number of open long and short positions in the NYMEX natural gas futures market was at the 1.242 million contract level on August 12. The metric has been declining over the recent trading sessions as market participants continue to wait for clues about the next price move. The supply side of the fundamental equation continues to weigh on the price and could mean that natural gas is heading below $2 per MMBtu. However, with the winter season only a few short months away, we are likely to see the pattern of higher lows remain intact.

Fourteen weeks to go until the withdrawal season and stocks remain high

There are now approximately fourteen weeks to go until the beginning of the 2020/2021 withdrawal season during the winter months. To reach last year’s peak level of 3.732 tcf, we would only need to see an average injection of 28.6 bcf. Meanwhile, moving to over four trillion cubic feet for the third time since the EIA began keeping records would require an average build of 47.8 bcf until November.

The supply data tells us that there is plenty of natural gas in storage across the US to meet all requirements during the coming winter season. The level of inventories is a bearish factor for the price of nearby NYMEX futures, which were steady at the $2.15 per MMBtu level after the latest report. I expect another move to the downside in the natural gas market, which is likely to create another buying opportunity as the peak season for demand approaches.

Natural gas has a long history as one of the most volatile commodities that trades on the futures exchange. However, fundamentals are likely to cap the upside during the winter season of 2020/2021.

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The United States Natural Gas Fund L.P. (UNG) was trading at $12.35 per share on Thursday afternoon, up $0.12 (+0.98%). Year-to-date, UNG has declined -26.75%, versus a 6.09% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #74 of 111 ETFs in the Commodity ETFs category.