- An ugly move to the downside
- Lots of winter left
- Island reversal is a target
January is the peak season month for the demand side of the fundamental equation in the natural gas market. The winter months are the time of the year when stockpiles fall as the requirements for heating rise.
On November 29, the price of NYMEX January natural gas futures fell to a low at $2.27 per MMBtu. When the nearby futures contract fell to a bottom at $2.029 in early August, the January contract’s low was at $2.475 per MMBtu. On Monday, December 9, the nearby futures fell to a lower low at $2.158.
Winter has arrived across the United States, and so far, the weather has been seasonal. However, the recent price action in the natural gas futures market has looked more like spring begins in a few weeks rather than the Christmas and New Year’s holidays. The United States Natural Gas Fund (UNG) is the unleveraged ETF product that moves higher and lower with the price of the energy commodity.
An ugly move to the downside
Peak season January natural gas futures on the NYMEX division of the Chicago Mercantile Exchange rose to a high at $2.98 per MMBtu on November 5. The market ran out of upside steam just below the $3 level.
As the daily chart highlights, natural gas fell to a low at $2.158 per MMBtu on December 9, the price dropped by 27.6%. At the same time, the total number of open long and short positions in the natural gas futures market rose from a low at 1.157 million contracts on November 12 to over 1.30 million contracts late last week. Rising open interest and falling price tend to be a technical validation of a bearish trend in a futures market. However, price momentum declined into oversold territory, which can be a sign that a recovery is overdue.
Lots of winter left
The move to the downside has been ugly as it extinguished the hopes of those holding long positions at the start of the peak season for demand in the natural gas market. At $2.158 per MMBtu on the January contract, the price fell well under the early August bottom at $2.475 in January futures when the nearby contract reached its low at $2.029 per MMBtu. Natural gas traded to its lowest level since 2016 in August since 2016 when the price found a low at $1.611.
It is only the middle of December, and there are three solid months of cold weather and high heating demand ahead for the natural gas market. However, as of November 29, inventories stood at 3.591 trillion cubic feet in storage across the US. There is plenty of natural gas available to meet peak season requirements, even if temperatures are below average for the winter of 2019/2020.
The natural gas market continues to look bearish, but the energy commodity has a habit of surprising market participants with explosive and implosive price moves with little warning.
Island reversal- and another gap
While the market looks like a disaster for anyone holding a long position these days, a technical formation on the daily and weekly charts continues to stick out like a sore thumb. In my latest piece last week on the EIA inventory report, I pointed out the gap from $2.826 to $2.829 on the January futures chart.
The weekly chart illustrates the void from $2.738 to $2.753. Gaps on charts often act as a magnet for price action in futures markets. As of the start of this week, the natural gas futures market put in another gap from the lows of the week of November 25 of $2.27 to the high on December 9 at $2.243 per MMBtu on both the weekly and the daily charts.
The price action in the natural gas market tends to be as fickle as the weather during the start of the winter season. A cold forecast could cause those gaps to disappear in the blink of an eye.
It is easy to be bearish on the prospects for the price of natural gas given the current price action. We could see the price fall below the $2 per MMBtu level and challenge the 2016 low at $1.611 as the spring season approaches. However, over the coming weeks, the risk-reward continues to favor a price recovery as the voids on the chart create juicy targets for the technical price action.
The United States Natural Gas Fund L.P. (UNG) was trading at $16.99 per share on Monday afternoon, down $1.04 (-5.77%). Year-to-date, UNG has declined -27.14%, versus a 18.37% 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.