- A new low in natural gas last week
- Inventories do not support the current price action in the energy commodity
- A test of the $2 level is on the horizon
Natural gas has been in a bear market since the price fell below the critical levels of support at the 2018 and 2017 lows at just over $2.50 per MMBtu. In 2016, the price of the energy commodity reached a bottom at $1.611. Over the following two years, the price held at above $2.50 during the seasonally week time of the year. 2019 has been a different story as the price has been heading towards the $2 level, the lowest price in over three years.
The natural gas market has changed dramatically since futures began trading on the NYMEX division of the CME in 1990. Massive discoveries of reserves in the Marcellus and Utica shale regions of the United States have increased the supply side of the fundamental equation for the energy commodity. Technological advances in fracking and fewer regulations have decreased the cost of extracting the gas from the crust of the earth.
The replacement of coal with natural gas in power generation expanded the demand side of the equation. Moreover, natural gas now travels outside the borders of the United States in liquid form by ocean vessels to consumers around the world. Necessity is the mother of invention, which has expanded the demand side of the fundamental equation for natural gas. The growth of the natural gas market since 1990 has been extraordinary. The United States Natural Gas Fund LP (UNG) is the most liquid non-leveraged product that replicated the price action in the natural gas futures market.
A new low in natural gas last week
Last week, the price of nearby September natural gas futures fell to a new and lower low at $2.029 per MMBtu. Even though the price declined to the lowest level since 2016, natural gas posted a gain in four of five sessions. However, the high for the week at $2.155 was another example of why the price action remains so bearish.
As the daily chart highlights, the gains in eighty percent of the days last week masked that the price of natural gas could not move above the lowest high of prior weeks dating back to 2016.
The weekly chart shows that the most recent lowest high was at $2.328 per MMBtu, 17.3 cents below last week’s peak. Therefore, the price action was an illusion as the bearish trend continues and could send natural gas on a trip to challenge $2 sooner, rather than later.
Inventories do not support the current price action in the energy commodity
One of the most bearish signs for a market is when it has every reason to move higher, and it cannot. Rallies on four of five days resulting in both a lower low and lower high is one example of the weak state of the natural gas futures market. Another was that the weekly inventory report from the Energy Information Administration came in at an injection of 55 billion cubic feet for the week ending on August 2 last Thursday. The injection was ten bcf lower than the prior week, but it could not support a rally to a higher high. Moreover, with total stockpiles of 2.689 trillion cubic feet in storage, they are still 4% below the five-year average for this time of the year. Since 2014, the lows in natural gas have been $2.882 in 2014, $1.684 in 2015, $1.611 in 2016, $2.522 in 2017, and $2.53 last year. The low for 2019 came last week at $2.029.
Meanwhile, the low during August in each of those years were $2.74 last year, $2.753 in 2017, $2.523 in 2016, $2.624 in 2015, and $3.727 in 2014. The numbers reveal a highly bearish tone for the natural gas market as the lows tend to come in February or March. Increased production is weighing on the price of the energy commodity in 2019, and the record output is the reason why August 2019 is the worst August for the natural gas market since way back in 1998, 21 years ago. At the same time, record demand is masking the injection numbers as the fundamental supply and demand equation for the energy commodity has grown.
A test of the $2 level is on the horizon
The monthly chart shows that natural gas has not appreciated in nine consecutive months.
To break the bearish pattern, the energy commodity will need to close the month of August above the $2.239 level on the nearby futures contract. As of the end of last week, the price was 12 cents below the July 2019 closing price.
The trend is your friend in futures markets, and with over three months to go in the 2019 injection season, natural gas looks headed for a challenge of the $2 level. However, the news is not all bad for the energy commodity. A push to the downside over the coming weeks to what could be the lowest price August 1998 which was at $1.61 per MMBtu could set up a golden buying opportunity for the peak season that begins in mid-November 2019 and runs through the winter months of 2020.
The United States Natural Gas Fund L.P. (UNG) was trading at $18.79 per share on Tuesday morning, up $0.45 (+2.45%). Year-to-date, UNG has declined -19.43%, versus a 9.72% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of ETFDailyNews.com.
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.