Natural Gas: Why 2020 Could Bring Increased Volatility

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November 5, 2019 11:51am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • Fracking has made the US the leader in natural gas

  • The 2020 Presidential election will be a referendum on fracking

  • Start thinking about the potential for a new dynamic in natural gas in 2021

The natural gas market is now steaming into the withdrawal season, where inventories will start to decline in November. Last year at this time, stockpiles of the energy commodity were at the lowest level in years. An early cold snap and low inventories combined to push the price of nearby NYMEX natural gas futures to a high of $4.929 per MMBtu last year. Last year’s peak was the highest price since 2014. This year, stocks are appreciably higher heading into the winter months, so a repeat performance of the price action in late 2018 is not likely.

Meanwhile, politics rather than inventories or the weather across the US could have a significant impact on prices next year at this time. The question voters may face in the 2020 Presidential election in the United States could be to frack or not to frack. The United States Natural Gas Fund (UNG) tracks the price of natural gas futures on a short-term basis.

Fracking has made the US the leader in natural gas

Over the past years, discoveries of massive reserves of natural gas in the Marcellus and Utica shale regions of the United States have changed the supply and demand equation for the energy commodity. Technology has allowed for the extraction of the gas from the crust of the earth via fracking. At the same time, supportive governmental policies for the energy industry have made the United States the world’s leader in the production of natural gas.

Natural gas had only moved via pipeline in the past, which limited distribution. Technological advances when it comes to liquifying the energy commodity now makes it possible for the gas to move around the globe on ocean vessels. Fracking and liquified natural gas have increased both the supply and the demand side of the fundamental equation for the energy commodity, putting the US in a leadership role.

The 2020 Presidential election will be a referendum on fracking

The Trump administration has championed oil and gas production, making the US energy independent. However, that could change in the coming years. Many members of the opposition party in the US has adopted the “Green New Deal” that calls for substantial changes in energy policy. The current leader in the polls for the Democrats is Massachusetts Senator Elizabeth Warren. The Senator has said that if she defeats President Trump in November 2020, she will ban fracking on day-one of her administration. Therefore, energy policy will be one of the leading issues for debate in next year’s election, which will be a referendum on fracking, among other issues facing the nation.

Start thinking about the potential for a new dynamic in natural gas in 2021

Fracking for oil and gas in the United States have pushed production to record levels. An about-face on energy policy by a future administration in Washington DC could have a dramatic impact on the price of the energy commodities.

While the oil and gas prices are not likely to move dramatically in the short-term, that could change in the coming months. We could see a significant increase in volatility as the prices of the energy commodities move higher and lower with the political polls as the November 2020 election draws nearer. Now is the time to start thinking about the effect that a change in administrations will have on the prices of oil and gas. We could also see lots of price variance in the shares of the companies that produce energy commodities.

Since October 11, the price of nearby December NYMEX natural gas futures has been rising as the peak season for demand begins this month.

(Source: CQG)

The price of the energy commodity has climbed from $2.388 to $2.738 and was at the $2.70 as of the close of business at the end of last week. The 14.7% appreciation since mid-October reflects seasonal factors that impact the natural gas futures market. However, as politics creep into the natural gas market over the coming months, the future of fracking could cause a lot more volatility. Politics and energy policy in the US could trump Mother Nature and create a roller coaster of price variance in 2020 and beyond.

The United States Natural Gas Fund L.P. (UNG) was trading at $22.77 per share on Tuesday morning, up $0.50 (+2.25%). Year-to-date, UNG has declined -2.36%, versus a 15.53% 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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