- The market expected a two bcf withdrawal
- The injection season begins with inventories above the two trillion level
- April rolls to May in the futures
On Monday, March 23, the price of nearby natural gas futures on the New York Mercantile Exchange division of the CME fell to a new low at $1.519 per MMBtu. The decline in the April futures contract took the energy commodity to its lowest level since 1995 when it hit $1.335. Natural gas futures began trading in 1990, and the all-time low came in 1992 at $1.02.
Natural gas is a volatile and seasonal product. While the low was just over $1 per MMBtu, the high in 2005 was at $15.65 as a Hurricane damaged infrastructure along the Louisiana Coast. The delivery point for the futures contract is at the Henry Hub in Erath, Louisiana. When it comes to seasonality, the price tends to rise to highs in November and December each year as demand peaks during the winter months and stockpiles decline. The price often makes a low in February-March as natural gas flows back into storage as the weather conditions warm. In a typical year, the low at $1.5190 per MMBtu on March 23 looked a lot like a bottom for the energy commodity. However, we should take nothing for granted as 2020 is no typical year.
The United States Natural Gas Fund (UNG) replicates the price action in the nearby NYMEX futures contract.
The market expected a two bcf withdrawal
On Thursday, March 26, the Energy Information Administration told the natural gas market that stockpiles of the energy commodity fell by a higher than expected 29 billion cubic feet for the week ending on March 20, 2020. Estimize, a market consensus website, had an average forecast of a decline of two bcf.
As the chart shows, the decline of 29 bcf put inventories at 79.5% above last year’s level and 17% over the five-year average for this time of the year.
As the ten-minute chart shows, the price was trading below the $1.70 level before the data release. It recovered to that price in the aftermath. The decline in inventories could be the final for the 2019/2020 withdrawal season.
The injection season begins with inventories above the two trillion level
As we are now at the end of March, natural gas will start to flow into storage, and the injections will likely begin to show up in next week’s data for the week ending on March 27. If Thursday’s data was the low, at 2.005 tcf, stocks found a bottom at 898 billion cubic feet above last year’s low at the end of the withdrawal season.
The elevated base going into the injection season could cause stocks to rise to over the four trillion level by the start of the 2020/2021 withdrawal season, which will begin in early November. However, that depends on the flow of gas over the next eight months. If the inventories build at the same pace as last year, we could be in for record stocks at the start of next winter. However, with the price at the lowest level of this century and debt-laden energy companies facing economic woes and bankruptcies, production is likely to decline. At the same time, with the US and global economies at a virtual halt, demand destruction could offset lower output the longer the world battles Coronavirus and its economic aftermath.
April rolls to May in the futures
April NYMEX natural gas futures have rolled to May over the past week. While April futures fell to a low of $1.519, the May contract’s low was at $1.587 per MMBtu.
The chart shows that the total number of open long and short positions in the natural gas futures arena has declined steadily and was sitting at 1.215 million contracts on March 25, just slightly above the level last year at this time. The decline tells us that many speculative shorts who had been riding the bearish trend lower have closed positions during the risk-off conditions created by the global pandemic.
Price momentum and relative strength indicators are sitting below neutral territory, and daily historical volatility is at 56.77%, not far below the highest level of 2020. Time will tell if we saw the low for this year at $1.519 on March 23. Seasonality during past years would suggest that the bottom is in, but 2020 is anything but an ordinary year.
The United States Natural Gas Fund L.P. (UNG) was trading at $12.79 per share on Thursday afternoon, down $0.25 (-1.92%). Year-to-date, UNG has declined -45.15%, versus a -3.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andrew 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.