Natural Gas Hits a Monumental Level

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March 30, 2020 11:36am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

 

  • Natural Gas futures hit twenty-five-year lows
  • Producers are on the edge
  • The 2020 Election- Energy Independence with government ownership or idle production?

 

Long before the price of oil fell to its lowest level since 2002 or natural gas to its low since way back in 1995, the shares of producing companies in the oil and gas arena were flashing a warning signal.

The number of cases of Coronavirus continued to mount last week, and markets are exhibiting the most extreme risk-off volatility since the 1930s. One of the victims of the global pandemic was the bull market in stocks. When the price of an asset drops by 20%, it tends to enter a bear market. The leading indices in the stock market fell by over 35% at the recent low. It seems like ages ago when stocks were making new highs on almost a daily basis, but the last new high came on February 20, barely over one month ago.

Oil and gas companies did not participate in the bull market in stocks in 2019 and into 2020. When the market collapsed, they did worse. OPEC and Russia addressed demand destruction on the back of Coronavirus by flooding the world with crude oil. We are now in a world of unprecedented central bank stimulus, and government bailouts as scientists scramble for treatments and a vaccine to save lives. When it comes to energy production in the US, the government will decide if the business is a national security issue or if it is time to relegate hydrocarbons to the history books. The United States Natural Gas fund moves higher and lower with the price of the energy commodity. The price recently dropped to its lowest level in a quarter of a century.

 

Twenty-five-year lows

On Monday, March 23, natural gas futures fell to yet another lower low in a continuation of the bearish trend that started in November 2019.

(Source: CQG)

The quarterly chart highlights that the price of the nearby natural gas futures contract hit its most recent low of $1.519 per MMBtu on March 23. The price fell to the lowest level since 1995 when natural gas moved to $1.335 during the third quarter and $1.25 per MMBtu at the start of the year. The nearby futures contract settled below the $1.70 level at the end of last week after another anemic bounce.

Producers are on the edge

The price action in the natural gas futures arena since November 2019 has been a problem for companies that extract the energy commodity from the crust of the earth. Moreover, low interest rates since the 2008 financial crisis have encouraged both oil and gas companies to carry significant levels of debt on their balance sheets.

A sign that energy producers were feeling financial strains was that the shares of companies in the sector lagged the stock market throughout 2019 and into early 2020. When the stock market fell dramatically starting in late February when Coronavirus spread past China’s border, the shares of oil and gas companies did even worse. As of the close of business on March 27, the S&P 500 was approximately 24% lower than the all-time high on February 19.

(Source: Barchart)

The chart of the Energy Select SPDR Fund (XLE) shows that the ETF that holds a portfolio of the top oil and gas producing companies reached its peak in 2014 at $101.52. At $21.85 level at the end of last week, the XLE was 78.5% lower than its record high. Rising levels of debt have weighed on the share prices of energy-producing companies. The global pandemic pushed the companies off the edge of a bearish cliff.

The 2020 Election- Energy Independence with government ownership or idle production?

When it comes to the natural gas market in the US, the Trump administration has been an advocate of fracking and increasing production. At the start of 2020, US energy production versus support for the “Green New Deal” by the opposition party looked like one of the critical issues for the 2020 Presidential election. Coronavirus has changed everything. With the energy producers facing bankruptcy on the back of low prices and a virtual shutdown of the US and global economies, bailouts are necessary to keep natural gas flowing. President Trump insists that US production is a national security matter. His challenger is likely to advocate for more regulations and less output.

Meanwhile, government bailouts over the coming weeks could lead to equity ownership of the leading energy companies, while others fall by the wayside. The fallout from the global pandemic will cause changes in the way we conduct our lives and businesses. If the US government continues to consider natural gas a national security issue, we could see some degree of nationalization. At the very least, a big chunk of equity in the hands of Washington DC would put government bureaucracy in charge of decision making.

When it comes to the price of natural gas, the futures typically make seasonal lows around this time of the year. However, March 2020 has turned out to be anything but an ordinary time in history.

 

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The United States Natural Gas Fund L.P. (UNG) was trading at $12.66 per share on Monday morning, down $0.01 (-0.08%). Year-to-date, UNG has declined -45.71%, versus a -2.78% 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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