Natural Gas Ends 2019 on a Sour Note

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December 31, 2019 1:28pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

 

  • Ending 2019 on a sour note
  • The spring season could be worse
  • Politics in the US could cause volatility in the natural gas market during the second half of 2020

 The United States is the Saudi Arabia of natural gas. Massive reserves of the energy commodity in the Marcellus and Utica shale regions of the US have led to record production. Technological advances in fracking have lowered output costs. At the same time, regulatory reforms under the Trump Administration have encouraged production.

 

Since necessity is the mother of invention, two new demand verticals have caused the demand side of the fundamental equation for natural gas to expand as supplies grew. Natural gas continues to replace coal in power generation. Moreover, natural gas in liquid form increased the addressable market as the energy commodity now travels around the world by ocean vessels to regions where the price is higher. Before the rise of LNG, natural gas only moved from points of production to consumption by pipeline, limiting its distribution. The United States Natural Gas Fund (UNG) tracks the price of natural gas that trades in the NYMEX division of the CME in the futures market.

 

Ending 2019 on a sour note

The end of 2019 is turning out to be similar to late 2015, the last time the price of the energy commodity traded at such a low price during the beginning of the winter season.

 

(Source: CQG)

The monthly chart highlights that the last time the nearby natural gas futures chart traded as low as it has in December 2019 during the final month of the year was in December 2015 when the price fell to a low at $1.684 per MMBtu. In 2016, the low was in December was $3.24, following year it fell to $2.568 during the same month. Last year, the low was $2.93. Last Friday, the price declined to a low at $2.138 on the nearby futures contract. A larger than expected inventory withdrawal of 161 billion cubic feet for the week ending on December 20 lifted the price back over the $2.20 level by the end of the session. However, long-term price momentum and relative strength remain in oversold territory. A total of 3.250 trillion cubic feet in storage around the US is keeping a lid on the natural gas market as there are plenty of stocks to meet demand during the peak winter season.

Meanwhile, if this period is anything like 2015/2016, we will see lower levels for natural gas futures in the spring.

 

The spring season could be worse

The December 2015 low in the natural gas futures market led to a correction that took the price to a high at just under $2.50 in January. By March, the price dropped to a lower low at $1.611 per MMBtu, which was the lowest level since July 1998 at $1.61.

Last August, the price fell to $2.029 before the uncertainty of the coming peak season lifted natural gas to just over the $2.90 level but buying dried up and selling pressure has been a dominant force since early November.

Based on the level of stocks, and the overall sentiment in the natural gas arena, any corrective rally will attract sellers over the coming weeks. In the New Year, markets will look towards spring, and speculative shorts could push the price lower to challenge the $2 level and perhaps the March 2016 low at $1.611.

 

Politics in the US could cause volatility in the natural gas market during the second half of 2020

The pattern of trading from 2015 through March 2016 suggests we could be in for months of selling in the natural gas market. After that period, a correction that took the price of just under $4 by December 2016.

The second half of 2020 could be a very volatile time in the natural gas futures market. Energy policy in the United States could shift dramatically if President Trump loses the November 2020 election to a Democrat. The rise of the progressive wing of the opposition party means that the “Green New Deal” will be an integral part of the party’s platform. The initiative would increase regulations on extracting fossil fuels from the crust of the earth. The record flow of natural gas will likely stop if Senator Elizabeth Warren becomes the President. She pledged to ban fracking on day one of her administration. Meanwhile, the 2020 election is likely to be a referendum on energy policy, and the oil and gas futures markets could become highly volatile in the second half of 2020. We could see political polls driving the price of natural gas higher and lower as the election comes at a time when volatility tends to peak.

For now, it looks like rallies will be selling opportunities in the natural gas market. However, the lower it goes in early 2020, the more opportunities will arise for later in the year.


The United States Natural Gas Fund L.P. (UNG) was trading at $16.78 per share on Tuesday afternoon, down $0.12 (-0.71%). Year-to-date, UNG has declined -28.04%, versus a 20.67% 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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