- Price failure is the norm since November 2019
- Three reasons that prices below $1.70 are a bargain
- Keep those stops tight and expect the unexpected
June natural gas futures traded to a low of $1.649 per MMBtu on April 2, where the price found a bottom and recovered to its highest level since January on May 5 when it hit $2.162 per MMBtu. The over 31% rally was another higher high since the early April low. After making lower highs and lower lows from November through April 2, the price action shifted to higher lows and higher highs.
The futures market ran out of gas on the upside on May 5, and since then, the price tanked. Last week, the June futures contract declined below the April 2 low and traded to a low of $1.595 on May 13. The move destroyed all of the technical work the futures market did over one month and pushed natural gas back into its bearish price pattern.
Natural gas has a long history as one of the most volatile commodities that trade in the futures market. Weak demand for all energy products in the current environment on the back of the global pandemic likely sent the price lower. The second consecutive triple-digit injection into storage last week did not help the price of natural gas. However, the selloff could create another buying opportunity in the energy commodity for the coming weeks. The United States Natural Gas Fund (UNG) is the ETF that tracks the price of nearby futures on NYMEX.
Price failure is the norm since November 2019
Natural gas fell back into its bearish price pattern last week after the price dropped from the May 5 high of $2.162 and losses accelerated.
As the weekly chart shows, after breaking the pattern of lower highs and lower lows from November through March, the move to $2.162 per MMBtu in early May broke the trend. However, the price ran out of steam on the upside, sending June futures to a low of $1.595 per MMBtu last week.
Price momentum and relative strength metrics were below neutral readings on the weekly chart. The move to the downside lifted the number of open long and short positions from 1.197 million contracts on May 7 to 1.279 million on May 14 as the price declined. Rising open interest and falling price tend to be a technical validation of a bearish trend in a futures market. Wide weekly trading ranges pushed the measure of historical volatility to over 58% at the end of the week, close to the highest level of the year. June futures settled at $1.646 per MMBtu on May 15.
Three reasons that prices below $1.70 are a bargain
At below the $1.70 level, risk-reward again favors the upside in the natural gas futures market. The first supportive factor is production. On Friday, May 15, Baker Hughes reported that the natural gas rig count in the US was at 79.
(Source: Baker Hughes)
As the chart illustrates, 185 gas rigs were operating last year at this time. Lower rigs translate to declining output.
The technical trading pattern since natural gas traded at its lowest price since 1985 is another factor that could support the price of the energy commodity.
The chart shows a series of higher weekly lows in the natural gas futures market. The most recent came last week at $1.595, which was two ticks higher than the previous higher low at $1.593 during the week of April 27.
Finally, in an article for ETF Daily News on May 7, I pointed out that there had been a “steady decline in the amount of natural gas stockpiles over the past seven weeks compared to the same time in 2019.” As of May 1, stocks were 52.3% above the previous year. Last week, the EIA reported inventory data for the week ending on May 8, continuing the trend. Stocks were 49.2% above the prior year.
The production data and technical pattern on the weekly chart could be telling is that risk-reward now favors the upside in the natural gas futures market with the price below $1.70 per MMBtu.
Keep those stops tight and expect the unexpected
Natural gas has a long history as a highly volatile energy commodity. The price has traded in a range from $1.02 to $15.65 per MMBtu since futures began trading in 1990. At $1.646 on the June contract on May 15, the price is not far off the low and miles away from the high over the past three decades.
While risk-reward favors the upside, and another move to the $2 level seems likely, controlling risk through tight stops is advisable in the current environment. If the crude oil market’s price action taught us anything when it fell into negative territory, it was to expect the unexpected in the energy sector.
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The United States Natural Gas Fund L.P. (UNG) was trading at $12.32 per share on Tuesday morning, up $0.22 (+1.82%). Year-to-date, UNG has declined -47.17%, versus a 11.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…