- Natural gas recovered from the low as injections declined and a storm approached Louisiana
- Technical resistance means stops could be building
- The reaction to the storm tells us that the natural gas market has changed
In 2005 and 2008, Hurricanes Katrina and Rita caused extensive damage throughout Louisiana, the home of the delivery point for NYMEX natural gas futures at the Henry Hub in Earth. The storms caused the price of the energy commodity to climb to a high of $15.65 per MMBtu in 2005 and $13.694 in 2008. As Hurricane Barry was barreling towards the Louisiana coast late last week, memories of the devastation that caused the price of the energy commodity to skyrocket resulted in some buying in the futures market.
Natural gas recovered from the low as injections declined and a storm approached Louisiana
The price of August natural gas futures fell to a low at $2.134 on June 20, but the market rang out if selling. As the daily chart shows, price momentum and relative strength fell into oversold territory, and the price recovered above $2.30 per MMBtu. As the storm clouds began gathering near Louisiana, the price moved to a high at $2.489 last week and settled at $2.453 on Friday, July 12.
Technical resistance means stops could be building
After falling to a low at $1.611 per MMBtu in 2016, the price of natural gas made a higher low in 2017.
As the weekly chart shows, in 2017, the bottom was at $2.522, and in 2018 the energy commodity made a marginally higher low at $2.53 per MMBtu. Both of the lows came in February. This past February, the price fell to $2.543, which appeared to be another higher low, but the rapid pace of injections into storage across the United States sent the price below the $2.50 level in mid-April. The technical breakdown caused the price to drop below the $2.20 level in June, which was the lowest level since 2016.
The support levels above $2.50 per MMBtu have become technical resistance levels. Last week, while the price rose to just under $2.49 with Hurricane Barry approaching, it did not challenge the technical levels on the upside. Buy stops are likely building above the market, which could send the price higher if the storm causes any significant damage to natural gas infrastructure in and around the Erath, Louisiana area.
The reaction to the storm tells us that the natural gas market has changed
In the past, a hurricane at the start of the season may have sent the price of natural gas appreciably higher. However, a metric is telling us that the market has matured over the past decade.
Open interest is the total number of open long and short positions in a futures market. In natural gas, as the supply and demand side of the fundamental equation has grown, the metric has increased steadily. As the volume and open interest rise in a futures market, it typically reduces price volatility and the potential for gaps on the up or the downside.
The quarterly chart shows that the price rose above $9.90 per MMBtu four times while open interest was below the one million contract level before 2009. However, since it moved above that level, the high price for the energy commodity has been $6.493 per MMBtu in 2016. Higher open interest and volume have likely lowered the upside potential for the price of natural gas. We are at the beginning of the 2019 hurricane season, but the price reaction in the natural gas market we witnessed in 2008 and before is not likely to make a repeat performance because of the expansion of infrastructure across the United States.
The United States Natural Gas Fund, LP (UNG) is the ETF that replicates the price action in the natural gas futures market. An active storm season over the coming months would increase the price variance of the ETF product.
About the Author
Andy 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.