Natural Gas Plunges to a 3.5 Year Low, Will Prices Continue to Fall?

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January 20, 2020 11:34am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • The market expected a 100 bcf withdrawal
  • Ten weeks left until the 2020 injection season
  • The price sits at a low level

 

After falling to a low of $2.083 per MMBtu on the nearby February NYMEX futures contract on January 3, the price of natural gas has been crawling higher. The price reached its latest peak of $2.255 on January 14.

Natural gas has traded at its lowest mid-winter prices since 2016 on a combination of bearish sentiment in the futures and stockpiles that are appreciably above last year at this time. The high level of inventories is the result of warmer-than-average temperatures across the United States. Natural gas is not only a combustible energy commodity in its natural form, but the price has a long history of price explosions and implosions.

Since natural gas futures began trading on the New York Mercantile Exchange division of the CME in 1990, the price has traded from a low of $1.02 to a high of $15.65 per MMBtu. Last Friday, the price probed below the $2.00 level for the first time since 2016. At just over $2.00 per MMBtu on January 17, natural gas is sitting close to historical lows. Meanwhile, the price has not traded over $6.50 per MMBtu in a dozen years since 2008.

The United States Natural Gas Fund (UNG) tracks the price action in the nearby NYMEX futures contract.

The market expected a 100 bcf withdrawal

According to the Estimize crowdsourcing website, the site expected a drawdown of around 100 bcf from storage for the week ending on January 10.

(Source: EIA)

As the chart highlights, the Energy Information Administration reported a decline in stockpiles of 109 billion cubic feet for the week that ended on January 10. The total amount of natural gas in storage around the US stood at 3.039 trillion cubic feet, 19.4% above last year’s level, and 5.2% over the five-year average for this time of the year. Higher stock levels have caused price weakness in the natural gas futures market since November.

 

Ten weeks left until the 2020 injection season

With approximately ten weeks left in the 2019/2020 withdrawal season, stockpiles would have to decline by 193.20 billion cubic feet on average each week to reach last year’s low of 1.107 tcf at the start of the 2020 injection season. Considering that the highest withdrawal so far this season was 161 bcf, we will end the peak season of demand with far more natural gas supplies in March 2020 than in March 2019.

At the end of last week, the price dropped below the critical $2 per MMBtu, which stood as an area of psychological support. Fundamental and technical factors could be pointing to a test of the March 2016 low of $1.611 per MMBtu by the time spring rolls around.

 

The price sits at a low level

The move below the $2 level was a significant event in the natural gas futures arena as it will continue to encourage speculative shorts looking for lower price levels.  

(Source: CQG)

The weekly chart highlights that natural gas not only slipped below $2, but it put in a bearish reversal on the weekly chart last week. The price rose to a high of $2.255 per MMBtu, which was marginally above the previous week’s high of $2.234 and fell and closed below the prior week’s low of $2.099. The settlement price on January 17 was $2.003 per MMBtu on the nearby February NYMEX futures contract.

At the same time, price momentum and relative strength indicators continue to decline, even though both metrics are on oversold territory. Open interest, the total number of open long and short positions in the natural gas futures market has increased to over 1.506 million contracts. Rising open interest and lower prices tend to be a technical validation of a bearish trend in a futures market.  

(Source: CQG)

The longer-term monthly chart illustrates that the next level of technical support now stands at the March 2016 low of $1.611 per MMBtu, which could act as a magnet for the price of the energy commodity. Market participants with speculative short positions are likely to continue to push the energy commodity to lower lows as they have both the fundamental and technical factors acting as winds in their bearish sails.

In 2016, the move to the lowest price of this century acted as a catalyst that pushed the price of natural gas futures to higher highs until reaching a peak of $4.929 in late 2018. Time will tell if the same fate awaits natural gas when it finally finds a bottom. For now, the trend is your friend, and it remains lower.


The United States Natural Gas Fund L.P. (UNG) was trading at $15.54 per share on Monday morning, down $0.54 (-3.36%). Year-to-date, UNG has declined -33.36%, versus a 24.89% 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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