Seasonality in Natural Gas, Can it Continue?

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April 9, 2020 1:54pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  •     The market expected the first injection of the season of 26 bcf
  •     The price bounced significantly over the past week
  •     Seasonality in natural gas- Can it continue?

 Natural gas traded to a low of $1.521 per MMBtu on the nearby May futures contract on April 1. The low in the continuous contract was two ticks lower at the $1.519 level during the week of March 23. Natural gas fell to its lowest price in a quarter of a century. In 1995, the price reached $1.335 and $1.25 per MMBtu.

The energy commodity’s path since November 2019 has been a series of lower highs and lower lows. Most of the selloffs throughout the winter months led to price recoveries that failed at a lower level than the previous peak price as selling emerged in a bearish environment.

The bearish price path of the natural gas market was firmly in place long before the spread of Coronavirus caused a deflationary spiral in markets across all asset classes. In early January, the peak time of the year for natural gas demand, the price of crude oil rose to a high of $65.65 per barrel on the nearby NYMEX futures contract. At that time, natural gas only made it up to a high of $2.255 per MMBtu on the continuous futures contract.

This week, the 2019/2020 withdrawal season finally came to an end as inventories in storage rose for the first time since early November 2019. The United States Natural Gas Fund (UNG) tracks the price of the energy commodity higher and lower.


The market expected the first injection of the season of 26 bcf

According to Estimize, the consensus data website, the market had expected the Energy Information Administration to report an injection of 26 billion cubic feet of natural gas into storage for the week ending on April 3. The rise in stocks the EIA said on April 9 was slightly higher than the consensus estimate. 

(Source: EIA)

As the chart highlights, inventories rose by 38 bcf to 2.024 trillion cubic feet as of April 3, which was 76.3% above last year’s level and 19.1% higher than the five-year average for this time of the year.

Stocks reached a low of 1.986 tcf at the end of the withdrawal season, which was 879 bcf higher than last year’s bottom. The high level of stockpiles of the energy commodity weighed on the price of natural gas futures throughout the 2019/2020 peak season.


The price bounced significantly over the past week

Natural gas tends to find a seasonal bottom at the end of the withdrawal season. At the end of March, the price of the continuous futures contract fell to its lowest price since 1995 at $1.519 per MMBtu. On April 2, the May contracts fell to just two ticks above the most recent low when it reached $1.521. The price of the energy commodity turned higher when it failed to make a lower low. 

(Source: CQG)

The chart shows that natural gas experienced another in a long series of price recoveries that took the price to a lower high. This time, the price reached $1.918 per MMBtu on April 8, but once again failed at and fell to below the $1.75 level on April 9 after the release of the latest inventory data from the EIA. Price momentum and relative strength indicators rose to over neutral readings. Meanwhile, the total number of open long and short positions continues to decline, reaching 1.186 million contracts on April 8, the lowest level since November 2019 at the start of the peak season for demand.


Seasonality in natural gas- Can it continue?

Seasonality in natural gas typically takes the price of the energy commodity higher at the end of the withdrawal season. However, 2020 is anything but an ordinary year in all markets.

An end to the pattern of lower highs in the natural gas futures arena depends on the ability to rise above the March high of $2.044 per MMBtu on the May futures contract. On the continuous futures contract, the price needs to surpass the $2.025 level, which was the February peak.

The injection season for 2020 is now underway in the natural gas arena. Stockpiles dipped below the 2 trillion cubic feet level briefly. The price action could depend on the trajectory of inflows into storage over the coming weeks and months. The weak financial condition of producers and low prices could cause the injections to be at a lower rate than in the past.

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The United States Natural Gas Fund L.P. (UNG) was trading at $13.28 per share on Thursday afternoon, down $0.27 (-1.99%). Year-to-date, UNG has declined -43.05%, versus a 5.71% 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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