Natural Gas Stocks are High, But the Price Remains Deeply Oversold

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December 12, 2019 4:16pm NYSE:UNG


 

  • Price weakness early in the week
  • The market expected a draw of around 53 bcf
  • Stocks are high, but the price remains deeply oversold

Natural gas futures on the New York Mercantile Exchange division of the CME gapped lower from the low of $2.328 last Friday, December 6, to its high of $2.258 per MMBtu on Monday, December 9. The price action created another void on the chart. The island reversal from early November remains intact far above the market price, which was below the $2.30 level following the latest data from the Energy Information Administration.

Natural gas continues to ignore that the temperatures at the beginning of the winter season increase the demand for heating. Before the latest EIA report, inventories of natural gas in storage across the United States stood at just below the 3.6 trillion cubic feet level. With almost 20% more natural gas stocks at the end of November than last year, there is more than enough to satisfy demand. The United States Natural Gas Fund (UNG) tracks the price of natural gas futures on the NYMEX.

 

Price weakness early in the week

On Friday, December 6, the price of January NYMEX natural gas futures closed at the $2.35 level. When the energy commodity futures reopened for trading on Sunday night, the price was at $2.21 and traded down to a low at $2.158 on December 9, a new and lower low.

 

(Source: CQG)

The daily chart shows that natural gas created another gap on the chart. As of Thursday, December 12, the price had only recovered to a high at $2.303 and was sitting below the $2.30 per MMBtu level.

 

The market expected a draw of around 53 bcf

I had anticipated that the Energy Information Administration would report a decline in stocks of between 50-60 billion cubic feet for the week ending on December 6. A crowdsource program I tend to use expected that the EIA would report that the amount of natural gas in storage around the US would fall by around 55 bcf.

(Source: EIA)

The data came in a bit above my expectations at a withdrawal of 73 bcf for the week ending on December 6. Total stocks declined to 3.518 trillion cubic feet, which was 20.3% above the level last year at this time. Meanwhile, stockpiles were still 0.4% below the five-year average, according to the EIA.

In another in a series of bearish signs for the natural gas market, the price of peak-season January futures remained below the $2.30 per MMBtu level as of midday on Thursday, December 12.

(Source: CQG)

The ten-minute chart illustrates the initial decline to a low at $2.259 on the January contract in the aftermath of the data. Natural gas then recovered to just under the $2.30 level.

 

Stocks are high, but the price remains deeply oversold

At 3.518 trillion cubic feet, stockpiles are at a level where they are sufficient to meet demand even if the average temperatures are below the norm over the winter season.

(Source: CQG)

The daily chart remains bearish in the natural gas futures arena. Open interest, the total number of open long and short positions increased as the price declined since late November. Rising open interest and falling price tend to be a technical validation of a bearish trend in a futures market. Daily historical volatility climbed to over 52% as January futures hit a new low this week.

Meanwhile, both price momentum and relative strength indicators are sitting in oversold territory. At the same time, gaps riddle the chart with an island reversal from $2.826 to $2.829 way above the market, and the void created from December 6 through 9 as the price gapped lower over the most recent weekend.

Natural gas has handed out lots of pain to anyone stubbornly holding a long position at the start of the 2019/2020 winter season. The price action remains bearish and has encouraged speculative shorts to stay in risk positions and add to them. However, natural gas has a long history of volatility and surprises. At the $2.30 level on December 12, it is still early in the peak season to write off the potential for a recovery rally.


The United States Natural Gas Fund L.P. (UNG) was trading at $17.93 per share on Thursday afternoon, up $0.71 (+4.12%). Year-to-date, UNG has declined -23.11%, versus a 19.41% 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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