Natural Gas Is Overbought, But the Price Continues to Rally

• A technical breakout- The November 2019 high is now the target
• A hurricane causes another push higher
• Inventories are a problem for natural gas, but the Buffett factor has been influential for the price of the energy commodity

The September futures contract in the natural gas futures market rolled to October last week in a sign that the injection season will soon end, and stockpiles will begin to decline as the peak demand season starts. The withdrawal season runs from November through March each year, and there are only approximately twelve weeks left until natural gas flows out of storage across the US to meet the rising heating requirements.

The October contract reached a low of $1.70 per MMBtu on June 26 when the continuous contract fell to a twenty-five-year low at $1.432 per MMBtu. At the most recent high of $2.743 on August 28, the price rallied 91.6% from the low on the continuous contract.

I had thought it was too early for a significant rally in the natural gas market over the past week, but I was wrong. The cure for low prices in commodity markets is low prices, and natural gas fell to a level where it ran out of selling. The United States Natural Gas Fund (UNG) follows the price of NYMEX futures higher and lower.

A technical breakout- The November 2019 high is now the target

The price of natural gas broke out to the upside on the weekly chart in early August.

Source: CQG

As the weekly chart shows, after trading to a high of $2.743 on August 28, the price pulled back to below the $2.70 level. Natural gas futures have rallied over the past six consecutive weeks. The move above $2.162 in early August was a technical breakout. Price momentum and relative strength indicators were in overbought territory at the end of last week.

Open interest dropped from over 1.31 million contracts at the end of June to 1.241 million at the end of last week. Short covering likely accounted for the decline in the total number of open long and short positions in the natural gas futures market. Natural gas rose to a new high for 2020. The upside target now stands at the November 2019 high of $2.905 per MMBtu.

A hurricane causes another push higher

Last week, Hurricane Laura, a category four storm, hit the states along the Gulf of Mexico. In 2005 and 2008, natural gas rose to over $10 per MMBtu when hurricanes Katrina and Rita wreaked havoc on natural gas infrastructure along the Louisiana coast. The delivery point for NYMEX natural gas futures is the Henry Hub in Erath, Louisiana, likely pushed the price of over the $2.70 level on the active month October futures.

There are approximately twelve weeks to go in the 2020 injection season in the natural gas market.  A challenge of the late 2019 high could run into resistance, given the level of stockpiles in storage across the United States. However, we are still in the hurricane season, and more storms that head for the Gulf of Mexico could cause buying to emerge over the coming weeks.

Inventories are a problem for natural gas, but the Buffett factor has been influential for the price of the energy commodity

Stockpiles of natural gas in storage across the US continue to be a warning sign for the energy commodity. It would only take an average weekly injection of just over 48 billion cubic feet over the next three months to push stocks over the four trillion cubic feet level for the third time since the EIA began tracking supplies. Even if the inventories do not reach that level, we will go into the peak season for 2020/2021 with more natural gas than last year when stocks reached 3.732 tcf. The level of supplies is a bearish factor that continues to hang over the energy commodity as it sits near the recent high.

Warren Buffett got a bargain when he purchased the transmission and pipeline assets of Dominion Energy (D) for $10 billion in cash and assumable debt. Since Berkshire Hathaway announced the acquisition, the price of natural gas has gone nowhere but higher. Me. Buffett gave a blessing to the natural gas market. The value investor bought when the price was at an unsustainable level on the downside. However, the level of stocks suggests that we could see another correction before seasonality takes the price higher as the winter season approaches.

I am bearish on natural gas but will only dip a toe into the market on the short side with a very tight stop. The trend is always your friend in markets, and it remains higher until it bends.

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The United States Natural Gas Fund L.P. (UNG) fell $0.65 (-4.54%) in premarket trading Monday. Year-to-date, UNG has declined -17.97%, versus a 10.11% 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 #60 of 111 ETFs in the Commodity ETFs category.