Natural Gas: Important Levels to Watch

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September 3, 2020 11:47am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

 

  • The market had expected a 48 bcf injection
  • Natural gas pulls back
  • Inventories remain at a high level 11 weeks to go until the 2020/2021 withdrawal season

Since late June, the natural gas market has been a bullish beast. The price dropped to a quarter of a century low on the nearby NYMEX futures contract on June 26. After trading down to $1.432 per MMBtu, the energy commodity recovered and reached a continuous contract high of $2.743 on August 28. The rise of over 91.5% in two months was another example of how the cure for low prices in commodities is low prices. Natural gas fell to an unsustainable level, and the price recovered.

Warren Buffett’s decision to purchase natural gas transmission and pipeline assets gave the market a psychological shot in the arm. At the same time, the approach of the 2020/2021 winter season and the uncertainty of the weather, and the decline of inventories in storage lifted the price of natural gas to the highest price in 2020.

On Thursday, September 1, with eleven weeks to go in the 2020 injection season, the Energy Information Administration reported its latest stockpile data for the week ending on August 28. The United States Natural Gas Fund (UNG) is the ETF product that follows the price action in the volatile energy commodity. ProShares Ultra Bloomberg Natural Gas (BOIL) and ProShares UltraShort Bloomberg Natural Gas (KOLD) are ETNs that provide double leverage for those looking to magnify the price moved on a short-term basis.

The market had expected a 48 bcf injection

According to Estimize, a crowdsourcing platform, the market had expected a 48 billion cubic feet natural gas injection into storage across the United States for the week ending August 28.

Source: EIA

As the chart shows, the injection came in below expectations at 35 bcf. Hurricane Laura’s impact on the states along the Gulf of Mexico likely caused a decline in production. Total stockpiles stood at 3.455 trillion cubic feet, which was 18.4% above last year’s level and 13.4% over the five-year average for the end of August. It was the twenty-second consecutive week where the percentage above last year’s level declined. On the week ending on March 20, at the start of the 2020 injection season, inventories were 79.5% above the previous year’s level.

Natural gas pulls back

The nearby NYMEX October natural gas futures contract rose from a low of $1.70 on June 26 to a high of $2.743 on August 28. Natural gas rose to the highest price of 2020 on both the October futures and continuous contracts. Over the past week, the price of the energy commodity corrected from the high.

Source: CQG

As the daily chart of October futures highlights, natural gas fell for four consecutive sessions from August 28 through September 2. The price fell to a low of $2.415 per MMBtu but recovered on September 3 before the EIA reported its latest data and was trading at just below the $2.55 level. Open interest, the total number of open long and short positions, was around the 1.247 million contract level. The metric has not moved all that much over recent weeks, but it edged lower as the price moved to the upside since late June. Price momentum and relative strength indicators turned lower in overbought territory and were approaching neutral readings on September 3. Daily historical volatility was sitting at just over the 50% level, just below the average level for August.

Inventories remain at a high level 11 weeks to go until the 2020/2021 withdrawal season

At 3.4555 tcf, inventories of natural gas were at an elevated level as of August 28. With approximately eleven weeks to go in the 2020 injection season, an average build of 25.2 billion cubic feet would push stockpiles over the peak in November 2019. An average injection of 49.6 bcf would send stocks to above four trillion cubic feet for the third time since the EIA began reporting inventory data in the natural gas market.

There will be plenty of natural gas available to meet all requirements during the 2020/2021 winter months. Inventories are at a level that does not support an explosive rally in the natural gas market, as we witnessed in late 2018 when stocks went into the peak season of demand with 3.234 tcf, and the price reached a high of $4.929 per MMBtu in November 2018.

The upside target in natural gas stands at the November 2019 high of $2.905. We could see aggressive shorts attempt to push the price lower over the coming days and weeks. Technical support stands at $2.228, the August 12 low on October futures, and the psychological $2 per MMBtu level. October futures had not traded below $2 since July 31, and time will tell if the level will hold as the withdrawal season is now under three months away.

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The United States Natural Gas Fund L.P. (UNG) was trading at $13.54 per share on Thursday morning, up $0.08 (+0.59%). Year-to-date, UNG has declined -19.69%, versus a 9.01% 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 #62 of 112 ETFs in the Commodity ETFs category.


About the Author: Andrew Hecht

andrew-hechtAndy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…


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