The Action in Natural Gas is a Buying Opportunity

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November 19, 2019 11:33am NYSE:UNG


  • A bearish week in the natural gas arena- An Island on the daily and weekly charts
  • A cold week across the US
  • The recent price action could be another buying opportunity

 

After trading to a high at $2.905 per MMBtu on November 5, the price of December NYMEX natural gas futures fell to a low at $2.57 on November 13. On Friday, November 13, the price was just under $2.70 level, which was lower than the previous week.

We are now at the beginning of the winter season in the natural gas market. Over the past years, price volatility has increased going into the winter months. The uncertainty of the demand for heating tends to peak around this time of the year. Last year, the price of natural gas rose to the highest level since 2014 at $4.929 because of an early cold snap and the lowest inventories at the end of the injection season in years.

In November 2019, we have experienced another early cold snap, but stockpiles of the energy commodity are significantly above last year’s level. According to the latest data from the Energy Information Administration, inventories as of the week ending on November 8 were over 15% higher than last year at this time. The amount of stocks going into the coldest months of the year are likely weighing on the natural gas futures market.

The United States Natural Gas Fund (UNG) tends to move higher and lower with the nearby futures that trade on the NYMEX division of the CME.

 

A bearish week in the natural gas arena- An Island on the daily and weekly charts

Natural gas prices rose to a high at $2.905 on November 5 and ran out of steam on the upside.

(Source: CQG)

As the daily chart shows, the price dropped from the most recent high on the December futures contract to a low at $2.57 per MMBtu on November 13. While the price recovered to settle at $2.688 per MMBtu last Friday, the price action has left an island reversal trading pattern on the daily chart. On the way up to the November 5 high, the price action initially left a gap between $2.738 and $2.842 per MMBtu. On the way down, the price action left a gap between $2.724 and $2.753, leaving an island between $2.738 and $2.753 on the daily chart.

(Source: CQG)

The same pattern is present on the weekly natural gas futures chart. I will be looking for natural gas to fill the one and one-half cent void over the coming sessions. As of the end of last week, the technical pattern stood as a warning to anyone holding a long position in the natural gas market.

A cold week across the US

Natural gas rose to just over the $2.90 per MMBtu level in early November on the back of forecasts for cold weather conditions across the United States. The early cold snap caused buying. Warmer forecasts over the coming week resulted in a correction.

At this time of the year, it is Mother Nature who is in charge of the path of least resistance for the price of natural gas. The energy commodity will be highly sensitive to the ever-changing weather forecasts over the coming weeks, and the price action will be as fickle as the season.

The recent price action could be another buying opportunity

Last week, the Energy Information Administration reported that natural gas inventories rose by three billion cubic feet for the week ending on November 8. The amount of natural gas in storage rose to 3.732 trillion cubic feet, which is likely to stand as the peak going into the winter season. As of Friday, November 15, the consensus estimates for the EIA’s inventory report for the week ending on November 15 was for a withdrawal of over 50 bcf from storage. While the level of inventories across the US was 15.1% below last year’s level, they were only 0.1% above the five-year average as of November 8.

We are heading into the winter season in the natural gas market, and we should see volatility increase as the price moves higher and lower with the weather forecasts over the coming weeks. I continue to believe that at the $2.70 per MMBtu level at the end of last week, the risk-reward continues to favor the upside. I expect at least one move to $3 per MMBtu or higher on the peak winter season January futures contract. The January futures contract settled at $2.75 per MMBtu level on Friday, November 15. The odds continue to favor $3 versus $2.50 for the coming week. Keep an eye on that island reversal. Natural gas needs to fill the void up to the $2.753 level to avoid further selling over the coming sessions. At this time of the year, it’s all about the weather in the natural gas futures arena.


The United States Natural Gas Fund L.P. (UNG) was trading at $19.77 per share on Tuesday morning, down $0.33 (-1.64%). Year-to-date, UNG has declined -15.22%, versus a 17.23% 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 #51 of 109 ETFs in the Commodity ETFs category.


About the Author: Andrew Hecht

andrew-hechtAndrew 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.


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