Is an Emerging Bullish Trend Forming in Natural Gas?

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February 18, 2020 8:30am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • The $1.80 level gives way
  • A magnet at just over $1.60
  • A new low is likely

Bear markets can last for extended periods, and often torture those market participants who attempt to buy and new lows, that turn out to be temporary levels on the way to even lower values. The natural gas futures market reached its high for the peak winter season of 2019/2020 in early November when the price traded to a high of $2.905 per MMBtu. The year before, the price exploded to $4.929 on the back of low inventories and an overabundance of speculative short positions.

The winter of 2019/2020 did nothing to provide support to the price of natural gas. The price fell below the $2 and $1.90 level in January. In February, the $1.80 level gave way. With only six weeks to go in the withdrawal season when stockpiles in storage decline, the price is steaming towards the lowest level in four years.

Bull markets can rise a lot higher than most traders and investors believe possible. Bear markets in commodities can take prices to levels that are lower than output costs. When a commodity’s price falls to the low end of its pricing cycle, production tends to decline, inventories fall, and the price eventually finds a bottom. The price of natural gas is coming close to the bottom end of its pricing cycle, but the futures market continues to act like a knife that is falling in slow motion.  The United States Natural Gas Fund (UNG) moves higher and lower with the price of the futures that trade on the NYMEX division of the CME.

The $1.80 level gives way

Last week, the price of natural gas fell to another new low. Natural gas has developed a habit of declining to lower lows each week from late 2019 through 2020. The winter of 2019/2020 has become a season of discontent for producers of the energy commodity and anyone with a long risk position.

(Source: CQG)

The weekly chart shows that last week the price fell to $1.753 per MMBtu before recovering to close at the $1.837 level on February 14. Natural gas traded to a high of $1.869 during the week. The energy commodity could not make it to the $1.90 level. While price momentum and relative strength indicators remain in oversold territory, the trend continued to be lower. Open interest, the total number of open long and short positions rose as the price declined, which is a technical validation of the bearish price action. Weekly historical volatility at just below 28% is at its lowest level since last summer. Last February, the measure of price variance was over 50% in February.

A magnet at just over $1.60

Natural gas traded to a new low last week and the lowest price since 2016. In February 2016, the price reached $1.682 per MMBtu. We still have plenty of time left in February to fall to that price.  

(Source: CQG)

The monthly chart shows that the first target for the bear market in natural gas stands at the March 2016 low of $1.611 per MMBtu. In 2016, the price of the volatile commodity declined to its lowest level since 1998 when it hit a bottom of $1.61, just one tick below the 2016 low.

 

A new low is likely

Last week, the Energy Information Administration reported that inventories fell by 115 billion cubic feet. Total stocks of 2.494 trillion cubic feet in storage across the United States were 31.7% above last year’s level and 9.4% above the five-year average for the end of the first week of February.

The supply and demand fundamentals are pointing to a continuation of the bearish price action, and a technical metric could be telling us that more selling is on the horizon.

 (Source: CQG)

The most recent bounce in natural gas that took the price from $1.753 to over $1.80 caused the open interest metric to decline. The total number of open long and short positions rose to a high of 1.54 million contracts early this month as the price was still dropping. The recent recovery took the metric to the 1.45 million contract level. In a futures market, rising price and falling open interest is not a validation of an emerging bullish trend or recovery. The price action, level of stockpiles, overall bearish sentiment, and the start of the 2020 injection season in the coming weeks all point to a lower low before natural gas finds a bottom. The recent decline in open interest was likely a result of profit-taking. With their pockets full of profits since November, speculative shorts are likely to hover above the market to re-establish short positions on any significant recovery over the coming weeks. Meanwhile, the risk of a short risk position will continue to rise the lower the price falls.

It has been a winter season where one day’s low has been the next day’s high in the natural gas market. All signs are pointing lower as March is right around the corner.


The United States Natural Gas Fund L.P. (UNG) was unchanged in after-hours trading Monday. Year-to-date, UNG has declined -38.51%, versus a 27.02% 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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