Opportunity: Natural Gas Prices Are Too Low

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October 16, 2019 2:51pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • At the lowest price in October since 2015
  • Inventories are climbing, but they will not hit four trillion cubic feet
  • Oversold on the long-term chart going into the peak season

Natural gas is one of the most volatile futures markets. Since the NYMEX first introduced the natural gas futures contract in 1990, the price traded from lows of $1.02 to highs of $15.65 per MMBtu.

The natural gas market has matured over the past almost thirty years. Discoveries of massive reserves of gas in the Marcellus and Utica shale regions of the US and technological advances in fracking to extract the gas from the crust of the earth have increased the supply side of the market. At the same time, replacing coal with natural gas in power generation and processing the gas into liquid form for exportation around the world on ocean vessels have expanded the demand side of the fundamental equation.

The growth of the natural gas market caused volume and the total number of open long and short positions in the futures market to increase dramatically. As the two metrics increase, volatility tends to contract. We have not seen a move to above $6.50 per MMBtu since 2008, and the price has remained above the $1.60 level since 1995.

As we head into the peak season for demand each year over the coming weeks, natural gas at under the $2.30 per MMBtu level, the price could be too low. The United States Natural Gas Fund ETF product (UNG) tracks the price of the futures market on a short-term basis.

At the lowest price in October since 2015

October tends to be a month where the natural gas futures market begins to prepare for the peak season for demand each year. Injections into storage turn to withdrawals in November. On October 11, the price fell to a low at $2.187 per MMBtu.

Last week, the price of nearby November natural gas futures settled at $2.214, near the low.

Source: CQG

The monthly chart highlights that at under $2.25 per MMBtu, the price of natural gas fell to its lowest level since 2015 in October. In October 2018, the low was at $3.001. In 2017, it was at $2.723, and in 2016 the bottom was at $2.627. 2015 was a year when natural gas inventories rose above the four trillion cubic feet level for the second time in history. In October 2015, the low price for the energy commodity was at $1.948 per MMBtu.

Inventories are climbing, but they will not hit four trillion cubic feet

On Thursday, October 10, the market had expected an injection into storage of around 99 billion cubic feet. The Energy Information Administration reported that stocks rose by 98 bcf, close to market expectations.

Total stockpiles of the energy commodity stood at 3.415 trillion cubic feet as of October 4, 16% above last year’s level, but still 0.3% below the five-year average for this time of the year. Stockpiles have already increased above last year’s high at the end of the injection season, which has put pressure on the price and sent it below $2.20 at the end of last week. However, to reach four trillion cubic feet, stocks will need to rise by an average of 117 bcf over the coming five weeks. Since injections tend to decline in November, we are likely to see stocks peak at around 3.8 tcf, which is below the record that stands at over the four tcf level.

Oversold on the long-term chart going into the peak season

Natural gas is heading into the peak season for demand at the lowest price since 2015. The long-term chart suggests that the volatile energy commodity could be ripe for a recovery over the coming weeks.

Source: CQG

The monthly chart illustrates that price momentum and relative strength indicators have declined into oversold territory at below $2.25 per MMBtu. The peak season of demand across the US is only weeks away. Seasonality could limit the downside potential for the natural gas futures market as the injection season ends and stockpiles begin to decline.

I had been writing that natural gas rallied too soon in mid-September when the price probed above the $2.70 level. As the winter season is now only weeks away, the decline towards the lows could be a leap of faith for those holding short positions. The price decline has occurred too early as the uncertainty of the winter season, and demand for natural gas will peak over the coming weeks.

The United States Natural Gas Fund L.P. (UNG) was trading at $19.70 per share on Wednesday afternoon, down $0.33 (-1.65%). Year-to-date, UNG has declined -15.52%, versus a 12.28% 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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