Natural Gas is at its Lowest Level in Years, is it Time to Buy?

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April 16, 2020 12:47pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

 

  • The market expected an injection of 45 bcf
  • Natural gas sits below the $1.60 per MMBtu level
  • The potential for a lower low rise

 

In November 2019, the price of natural gas reached a seasonal high of $2.905 per MMBtu, substantially below the peak from November 2018 when the energy commodity climbed to $4.929 per MMBtu. Since last November, the price has done nothing but make lower highs and lower lows. Each new low led to a bounce in the natural gas futures arena that ran out of upside steam before reaching the previous short-term peak.

The most recent low came at the end of March when the price of nearby natural gas futures reached $1.519 per MMBtu, the lowest price since 1995. After a recovery to just over the $1.90 level, the price failed and was trading at just below the $1.60 level on Thursday, April 16. The price was once again probing into the $1.50s.

Meanwhile, with the price of crude oil back below $20 per barrel on the back a demand disaster, natural gas could face the same fate. The price was a stone’s throw away from the late March low after the Energy Information Administration reported its second injection of the season on Thursday. The United States Natural Gas Fund (UNG) replicates the price action in the nearby NYMEX natural gas futures market.

The market expected an injection of 45 bcf

The average consensus estimate for the build in storage for the week ending on April 10 was for an injection of 45 billion cubic feet according to Estimize.

(Source: EIA)

The chart shows that the injection of 73 billion cubic feet came in over the projection levels. Total stocks stand at 2.097 trillion cubic feet, 71.7% above last year’s level, and 21.4% over the five-year average for this time of the year.  

(Source: CQG)

The ten-minute chart shows that the price fell to the low at the time of the EIA’s latest release and rallied a bit from $1.555 per MMBtu in the aftermath of the report despite the higher than expected injection on April 16.

Natural gas sits below the $1.60 per MMBtu level

The bearish trend and pattern of lower highs in the natural gas market remained intact as of April 16.

(Source: CQG)

As the daily chart of May futures illustrates, price momentum and relative strength indicators were pointing lower and were below neutral readings on April 16. Daily historical volatility at 82.9% was near the highest level of 2020 on the nearby contract.

Meanwhile, the total number of open long and short positions edged higher from 1.186 million contracts on April 8, the day that natural gas hit its most recent high of $1.918 per MMBtu to 1.24 million on April 15, an increase of 54,000 contracts or 4.55%.

The potential for a lower low rise

On the May contract, the technical support level stands at the April 2 low of $1.521 per MMBtu. After the recovery that failed at just over $1.90, the rise in open interest is a technical validation of the continuation of a bearish trend in the energy commodity. Throughout late 2019 and 2020, each attempt at a recovery attracted selling. The continuous contract low of $1.519 is now the gateway to another new twenty-five-year low in the natural gas market. While the technical trend remains bearish, fundamentals also support another move to the downside. The price action in the crude oil market at below $20 per barrel is another sign of weakness in demand for energy commodities during the shutdown to slow the spread of Coronavirus.

(Source: CQG)

As the quarterly chart shows, the long-term levels of technical support stand at the 1995 lows of $1.335 and $1.25 per MMBtu.

When technical and fundamental factors point lower for a market, new lows often are on the horizon. Natural gas is at its lowest level in years, but that does not mean the price cannot work its way even lower.

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The United States Natural Gas Fund L.P. (UNG) was trading at $11.99 per share on Thursday afternoon, down $0.05 (-0.42%). Year-to-date, UNG has declined -48.58%, versus a 4.08% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of F (Strong Sell), and is ranked #66 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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