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Seasonality says it is still too early for a significant rally
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The weekly chart looks more constructive than the daily
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Another opportunity to buy on a dip could be coming soon- Look for a higher low
After trading down to a low of $1.583 on June 26, natural gas made a higher low at $1.646 on July 20. The constructive trading pattern gave way to a rally that took the price of the nearby September futures to a high of $2.379 per MMBtu on August 14. The price settled at $2.356 at the end of last week, just near the high.
Natural gas can be one of the most volatile commodities that trade on the futures exchange.
Since the NYMEX introduced futures on the energy product, the price has traded from a low of $1.02 to a high of $15.65 per MMBtu. With the 2020/2021 winter season approaches, the price bias tends to be on the upside. The time of the year when inventories decline begins in November, but stockpiles are significantly above last year’s level and the five-year average, which could prevent any significant rally.
In November 2019, the price rose to a high of $2.905 before falling to the lowest price in a quarter of a century in June when natural gas fell to $1.432 per MMBtu on the continuous futures contract.
The United States Natural Gas Fund (UNG) moves higher and lower with the price of NYMEX futures.
Seasonality says it is still too early for a significant rally
The EIA reported a slightly higher than expected injection into storage for the week ending on August 7.
The market projections were for a 40 billion cubic feet build, but the inventories rose by 58 bcf. The price of natural gas drifted slightly lower in the aftermath of the report but remained above the $2 per MMBtu level.
As we are now in the middle of August, there are still more than three months to go before the beginning of the withdrawal season in the natural gas market in the United States.
Inventories are likely to be at the highest level in years. In November 2019, stockpiles peaked at 3.732 trillion cubic feet.
We will only need to see an average increase of a little under 29 bcf to reach last year’s level.
A move to over four trillion cubic feet requires an average build of less than 48 bcf. The level of stockpiles and seasonality in mid-August tells us that it is still early for any upside fireworks in the natural gas futures market on NYMEX.
The weekly chart looks more constructive than the daily
At the $2.35 level at the end of last week, natural gas could be heading for a test of the early May peak.
Source: CQG
The daily chart shows that the latest high at $2.379 on August 14 was below the early May peak at $2.499 on the September futures contract. Price momentum and relative strength indicators were in overbought territory.
Open interest, the total number of open long and short positions in the natural gas futures market at 1.253 million contracts at the end of last week, had been drifting lower since June. The lower level of risk positions is a sign that speculators and hedgers are not rushing into the natural gas market in mid-August.
Instead, they have been closing long and short exposures over the recent weeks. The daily chart looks like the price could run out of upside steam.
Source: CQG
Meanwhile, the longer-term weekly chart looks a bit more favorable for the price prospects of natural gas. The continuous contract has made higher lows since June after hitting the quarter-of-a-century low of $1.432 per MMBtu. Natural gas hit a higher low of $1.558 in July and $1.605 per MMBtu later that same month, which was the most recent weekly low.
Meanwhile, natural gas rose to a high of $2.379 in mid-August, which surpassed the early May high and the first level of technical resistance at $2.162. Higher lows and higher highs on the weekly chart are a constructive sign for the energy commodity. Natural gas traded to its highest price in 2020 last week and since early December 2019.
Another opportunity to buy on a dip could be coming soon- Look for a higher low
It may be too early for natural gas to make a substantial move to the upside. The high level of stockpiles, which are significantly above last year’s level and the five-year average, are a factor that should continue to limit rallies in the energy commodity.
November is still over three months away, so any seasonal buying is not likely to appear in the natural gas market for at least the next month. Finally, the trading pattern over the past years has been bearish, and speculative shorts have had plenty of success selling on rallies and pushing the price lower.
Therefore, we should see another period of price weakness that takes the price below the $2 level. I am looking for another higher low above the $1.605 level on the weekly chart, and over $1.781 on the active month September futures. I will be a scale down buyer below the $2 level on the next dip to get ready for a seasonal rally this fall.
However, the high level of inventories could keep the price below the November 2019 high at $2.905, which stands as the critical level of technical resistance in the natural gas futures market going into the winter of 2020/2021.
Warren Buffett gave the natural gas market a vote of confidence with his purchase of Dominion Energy’s (D) transmission and pipeline assets. The price has moved higher since the announcement of the investment. We are still in the heart of the summer season where stocks are building for the coming peak season. The odds continue to favor another correction, but the recent trend has been higher.
I will continue to approach the market with tight stops. Small losses as the price move higher could give way to a profitable opportunity on the downside if the natural gas market decides to take another elevator ride lower.