Natural Gas: Why the Downside Risk is Limited

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September 25, 2019 11:30am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • Backing off new highs

  • Inventories grow

  • The action in oil could support gas

In November 2018, the price of natural gas rose to the highest price since 2014 when it traded at $4.929 per MMBtu. The price of natural gas rose at the start of the peak season of demand during the winter months when inventories fall. The amount of natural gas in storage around the US fell to its lowest level in years last November, which helped propel the price to a multiyear high.

After rising to the highest price in years in late 2018, the price fell through technical support and reached a multiyear low in early August at $2.029 per MMBtu. Natural gas fell to its lowest price level since 2016. Technical support stood at just above the $2.50 level, which was the low from 2018 and 2017. After the price moved through the support level in April, it continued to make lower highs and lower lows until it found a bottom at just over the $2 per MMBtu level in early August.

The summer has ended, and the winter withdrawal season is now only two months away. The price of natural gas recovered, reaching its most recent high at $2.71 per MMBtu last week. As I wrote last week, it is still a little early for a sustained rally into the peak season. At the end of last week, nearby natural gas futures were back at the around the $2.53 level, which is a pivot point. The United States Natural Gas Fund (UNG) is the most liquid natural gas ETF product that follows the price of the natural gas futures market higher and lower.

Backing off new highs

On Tuesday, September 17, the price of October natural gas futures rose to a high at $2.71 per MMBtu where the market ran out of buying.

(Source: CQG)

As the daily chart highlights, the price dropped over four consecutive sessions last week to a low at $2.506 and settled the week at $2.534 per MMBtu. Price momentum and relative strength had risen into overbought territory on the short-term chart where it crossed lower. Open interest, the total number of open long and short positions in the future market has been dropping steadily since mid-August. The decline in the metric is a likely sign that the shorts who pushed the price of the energy commodity to a low in early August threw in the towel and covered their risk positions.

The end of the third quarter of 2019 is approaching, and the winter season is on the horizon. However, there are still around eight weeks of injections into storage around the US on the horizon, so the price of natural gas was not ready to move into peak season mode.

Inventories grow

Last Thursday, the Energy Information Administration said that natural gas inventories rose by 84 billion cubic feet for the week ending on September 13. With total stocks at 3.103 trillion cubic feet, they are headed for a higher level this year compared to last when they rose to a high at 3.247 tcf.

Stocks were 14.5% above last year’s level as of the most recent report from the EIA. However, they are still 2.4% below the five-year average for this time of the year. Stockpiles will likely peak somewhere around the 3.7 to 3.8 tcf level when demand for heating rises, and inventories begin to fall. We are not likely to see a move to almost the $5 level as we witnessed in November 2018 this year. However, an early start to the winter season could cause some fireworks on the upside for the always volatile energy commodity.

The action in oil could support gas

The crude oil market spiked higher last week as seventeen drones took out 50% of Saudi Arabian oil production. The rising tensions in the Middle East could cause more incidents over the coming weeks. Rising tension in the world’s most turbulent political region is likely to keep a bid under the oil market. While natural gas has different fundamentals, further spikes in the price of oil could provide support for natural gas over the coming weeks. As the market moves towards the winter season, natural gas will become more sensitive to news and price volatility in the oil market. However, last year, oil fell precipitously during the final quarter of the year when natural gas prices exploded higher.

With natural gas at the $2.50 level moving into the time of the year when stocks will begin to fall, the weather conditions will be the primary factor when it comes to the path of least resistance of the price of the energy commodity. Seasonality is likely to limit the downside potential for the price of natural gas over the coming weeks and months, while the upside can always become explosive over the coming months.

The United States Natural Gas Fund L.P. (UNG) was trading at $21.46 per share on Wednesday morning, down $0.13 (-0.60%). Year-to-date, UNG has declined -7.98%, versus a 11.49% 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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