Another Disappointing Inventory Report for the Natural Gas Bulls

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January 3, 2020 12:58pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • The consensus estimate was for a withdrawal of 82 bcf
  • Natural gas below the $2.20 level
  • The New Year means spring is around the corner

Happy New Year to all! All the best for a happy, healthy, safe, and profitable 2019. It is now the roaring 2020’s, and it did not take long before lots of action in markets returned across all asset classes. On the first trading day of the New Year, US stocks moved significantly higher. After the markets closed, news that a US airstrike killed Iranian General Soleimani at the Baghdad airport, sent crude oil to a new high. The price of gold also gained as the tensions in the Middle East rose to a boiling point.

Meanwhile, another energy commodity began 2020 like it ended 2019. February NYMEX natural gas futures fell to a new and lower low on January 3 at $2.083 per MMBtu.

On Friday morning, the Energy Information Administration released its weekly natural gas storage data for the week ending on December 27. The data came out one day late because of the New Year’s holiday on Wednesday. The United States Natural Gas Fund (UNG) follows the price of the energy commodity higher and lower.

The consensus estimate was for a withdrawal of 82 bcf

According to the Estimize website, the market had expected a withdrawal from storage of around 82 billion cubic feet for the week ending on December 27. The warmer weather set the expectation at half the decline from the previous week when stockpiles of natural gas fell by 161 bcf.

Warm weather conditions during the holiday week caused the withdrawal data to come in at an even lower level than the market had expected.

(Source: EIA)

As the chart illustrates, the withdrawal brought total stocks to 3.192 trillion cubic feet for the last full week of December. Inventories were 17.9% above the previous year’s level, but still 1.2% below the five-year average for the end of the year.

The price of nearby natural gas futures did not move lower in the aftermath of the data as they had already made a new low in the hours leading up to the weekly EIA report.

Natural gas below the $2.20 level

The price of crude oil was trading at its highest level since April 2018 and above the September high when the drone attack temporarily knocked out half of Saudi Arabia’s daily production on Friday, January 3. Meanwhile, nearby natural gas futures fell to a new and lower low on the February futures contract.

(Source: CQG)

The weekly chart shows that the low on January 3 at $2.083 per MMBtu was the lowest price for natural gas futures since August when the price reached a bottom at $2.029 per MMBtu.  

(Source: CQG)

The ten-minute chart shows that the low came before the release of the EIA’s data. Even though the withdrawal was below market expectations, and a bearish factor for the price, the energy commodity rebounded to around the $2.15 level on the nearby February futures contract.

The New Year means spring is around the corner

The weekly chart shows that natural gas has been moving steadily lower since the early November high at $2.905 per MMBtu. With the end of the withdrawal season in the natural gas market only around ten weeks away, the hopes for any recovery rally are fading, given the level of stocks and weather forecasts across the US.

Spring will be here before we know it, and the first target for the natural gas market on the downside is the psychological $2 per MMBtu level. Below there, the March 2016 low of $1.611 could be a bullseye for the natural gas futures market.

While the island reversal from November continues to sit on the weekly chart between $2.781 and $2.786, the price action is signaling that the path of least resistance for the price of the energy commodity continues to be lower.

The United States Natural Gas Fund L.P. (UNG) was trading at $16.45 per share on Friday afternoon, down $0.02 (-0.12%). Year-to-date, UNG has declined -29.46%, versus a 21.70% 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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