- A rally coming into this week’s data release
- The market expected a 54 bcf injection
- The EIA reported an injection of 56 bcf
The realization that the winter season has arrived lifted the price of December natural gas futures over the recent trading sessions. Since mid-October, December futures have moved from $2.388 to a high at $2.905 on November 5, a rise of 21.6%.
The peak season for demand across the United States begins each year in mid-November. As consumer demand for heating rises during the cold months, inventories of natural gas drop from November through March. From March through November, natural gas stockpiles build in preparation for the heating season.
Meanwhile, the fundamental equation for natural gas has changed dramatically over the past years. Massive discoveries of reserves in the Marcellus and Utica Shale regions of the US and technological advances in fracking and a friendly regulatory environment have made supplies explode. At the same time, natural gas has replaced coal as the main ingredient in power generation, and natural gas in liquid form now travels around the world to points of consumption. The profile of natural gas has increased from both the supply and demand sides of the market. This past week, the price action in the natural gas market reflected the seasonality and uncertainty of demand during the coming winter months.
The United States Natural Gas Fund (UNG) moves higher and lower with the price of nearby natural gas futures.
A rally coming into this week’s data release
The Energy Information Administration releases data on natural gas stockpiles each Thursday at 10:30 AM EST. As the market awaited the weekly data. The price of natural gas moved higher. On October 31, the date of the last EIA data, the price of December futures settled at $2.638 per MMBtu.
The daily chart highlights that the price of natural gas rose from the October 31 close to a high at $2.905 per MMBtu on November 6 and settled at the $2.833 level. In a sign the market was getting a bit ahead of itself, the price momentum indicator rose into overbought territory, and relative strength was heading in that direction. Perhaps more significantly, the decline in open interest from 1.29 million contracts on October 21 to 1.17 million as of November 6 was not a technical validation of the move to the upside in the natural gas futures market.
The market expected a 54 bcf injection
With the 2019 injection season winding down, the market’s consensus estimate was for stockpiles to climb by 54 bcf for the week ending November 1. After an injection of 89 bcf for the previous week, the closer natural gas gets to the winter season, the injections typically decline.
The 2019 /2020 withdrawal season will begin either as of November 8 or 15. The time of the year when stockpiles decline during the winter months will run through mid to late March, depending on the weather conditions across the United States.
The EIA reported an injection of 34 bcf
In a sign that the winter is just corner, the EIA told the natural gas market that stocks rose by a less than expected 34 billion cubic feet for the week ending on November 1.
As the chart shows, the small increase pushed the total amount of natural gas in storage to 3.729 trillion cubic feet, 16.6% above last year’s level, and 0.8% above the five-year average for this time of the year. It now looks like stocks will find a peak at around the 3.75 tcf level before they begin to decline over the coming weeks.
The lower than expected injection should have been bullish for the price of natural gas, but technical indicators displayed an overbought condition going into the data release.
The ten-minute chart shows that the price briefly spiked to a high at $2.882 in the aftermath of the EIA data, but it sank back to below the $2.80 level before long.
I continue to believe that any significant dips in the natural gas futures market would create a compelling buying opportunity with the uncertainty of the entire winter season ahead before the Thanksgiving holiday.
The United States Natural Gas Fund L.P. (UNG) was trading at $21.87 per share on Thursday afternoon, down $0.48 (-2.15%). Year-to-date, UNG has declined -6.22%, versus a 16.15% rise in the benchmark S&P 500 index during the same period.
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.