We Could See an Ugly Spring in Natural Gas

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December 23, 2019 8:14pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

 

  • Memories of late 2015 and early 2016 in the natural gas futures market
  • Inventories are higher than last year
  • The price action is bearish- Selling above could come to market over the coming weeks

 

Natural gas is a combustible energy commodity in its natural form when it comes out of the crust of the earth. The price action in the natural gas futures that trade on the NYMEX division of the CME can be equally combustible as the price range since 1990 has been from $1.02 to $15.65 per MMBtu.

Price implosions and explosions are routine events in the natural gas market. The most recent implosion took the price to the lowest level since the late 1990s when it traded to a low at $1.611 per MMBtu in March 2016. When it comes to price action on the upside, during the final quarter of 2018, the price rose to a high at $4.929 per MMBtu, the highest price since 2016. In 2016, discoveries of massive reserves in the Marcellus and Utica shale regions of the US, together with technological advances in extracting natural gas from the crust of the earth, led to the decline. Last year, the lowest level of inventories in years combined with speculative short positions going into the peak season for demand took the price to highs at just below $5 per MMBtu. This year, the bears are back in control. The price was a bit above the $2.30 per MMBtu level as the winter season only began on Saturday, December 21. The United States Natural Gas Fund (UNG) tracks the price action in the natural gas futures market. The Velocity Shares 3X Long Natural Gas ETN (UGAZ) and its bearish counterpart (DGAZ) magnify the price action in the natural gas futures market on a short-term basis.

 

Memories of late 2015 and early 2016 in the natural gas futures market

The price of nearby natural gas futures has not been this low during the final month of the year since December 2015.

 

(Source: CQG)

The monthly chart shows that in December 2018, the low price for natural gas futures was at $2.96 per MMBtu. In 2017, the bottom during the final month of the year was $2.568, and in 2016, $3.242 was the low in December. In 2015, the price fell to $1.684 during the final month of the year. Natural gas traded down to $1.611 in March 2016, the lowest price since the late 1990s. The low this December has been $2.158 with a high at $2.51, both below the lows since December 2015.

Inventories are higher than last year

Record production of natural gas in the US has led to the highest inventory levels since late 2015. As of the end of the week of December 13, the total amount of natural gas in storage around the US stood at 3.411 trillion cubic feet. Last year during the same week, stockpiles were at 2.773 tcf, significantly lower than this year. In 2017 they stood at 3.444 tcf, and in 2016 at 3.597 tcf. In 2015, stocks in mid-December were at 3.814 tcf. While stockpiles are at higher levels than in 2018, they were lower than in 2015 through 2017. However, the price action has been the most bearish since 2015 when there were over 3.8 trillion cubic feet of the energy commodity in inventories going into the coldest months of winter.

While record production has led to higher stocks in 2019 compared to 2018, the bearish price action does not necessarily reflect the fundamental data from the Energy Information Administration.

The price action is bearish- Selling above could come to market over the coming weeks

I continue to believe that we could see a sudden price recovery in the natural gas futures market.

(Source: CQG)

The daily chart shows that price momentum began trending higher since early December, while relative strength remains below neutral. Open interest at around the 1.294 million contract level at the end of last week was near the highs since August. Given the recent price action, there are likely speculative shorts holding risk positions in the natural gas futures arena.

Meanwhile, any significant price recovery is bound to attract selling after the bearish start to the winter season. Moreover, as we move towards the spring in January and February, the lack of any prolonged period of cold weather conditions could cause emboldened shorts to push the price to $2 or lower in the early spring. Technical support on the continuous contract stands at the August 2019 low at $2.029. Below there, the March 2016 bottom at $1.611 per MMBtu could act as a magnet for the price. I hope to see the price challenge that level, as it could set up an opportunity for long positions with limited risk.


The United States Natural Gas Fund L.P. (UNG) . Year-to-date, UNG has declined -26.37%, versus a 20.85% 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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