- A price recovery as March is around the corner
- Sellers above the $2 level
- Look for seasonal lows in March and April
The price of nearby NYMEX natural gas futures rose to a high of $4.929 per MMBtu in November 2018 at the start of the 2018/2019 peak season for demand. Stockpiles of natural gas in storage had declined to the lowest level in years. At the same time, the unwind of a speculative risk position that had hedge funds short natural gas and long crude oil as risk-off conditions gripped markets across all asset classes during the final quarter of 2018. Closing that position caused the price of natural gas to rise to its highest price since 2014 in late 2018. By the end of the winter season in early 2019, the price of natural gas fell to a low of $2.439 by late April last year as the 2019 injection season got underway.
In late 2019, stockpiles were at a high level compared to the previous year, and there were no significant risk positions that took the price of natural gas higher going into the winter months. The price peaked at $2.905 per MMBtu in November and had declined steadily on the back of stockpiles that have been consistently higher than last year and the five-year average. The price of natural gas hit its most recent low on February 11 at $1.753 per MMBtu. In a sign that market participants became a bit over-enthusiastic as they sold every uptick in the futures market, the price gapped higher last week. It moved to just under the $2 per MMBtu level for the first time since mid-January.
The United States Natural Gas Fund (UNG) moves higher and lower with the price of nearby natural gas futures on the NYMEX division of the CME.
A price recovery as March is around the corner
Last week, the natural gas futures market experienced a long-overdue recovery. The price of the energy commodity closed at $1.85 per MMBtu on Friday, February 14. The price gapped higher on February 17.
The chart shows that the move to the upside on Monday, February 17, and rally that followed created a void between Friday’s high at $1.854 and Monday’s low at $1.874 per MMBtu. Since the move occurred over a weekend, it created a gap on the weekly chart.
Price momentum and relative strength indicators had declined into deeply oversold conditions as the price of nearby natural gas futures fell to the lowest price since 2016 at $1.753 on February 11. The recovery lifted the metrics above neutral readings. Daily historical volatility had dropped to below 26% in early February. The move to the upside increased the measure of price variance to over 47% at the end of last week. On Thursday, February 20, the price of March futures probed above the $2 per MMBtu level for the first time since January. However, with March right around the corner, the rally in natural gas came a little late as the peak season for demand will end next month.
Sellers above the $2 level
One of the clues that the market would run out of steam at above the $2 per MMBtu level was the decline in open interest as the price of natural gas moved to the upside.
The daily chart of March futures shows that the total number of the open long and short positions in natural gas peaked at 1.54 million contracts on February 6 as the price of the energy commodity was on its way to the most recent low. When open interest rises and the price of a futures contract declines, it tends to be a technical validation of a bearish trend. The metric had been climbing steadily since November as the price plunged.
The rise in open interest was a sign that more speculative shorts were joining the bearish party as the price reached lower lows. However, open interest declined to 1.412 million contracts at the end of last week, in a sign that technical short-covering caused the rally, which ran out of steam above $2 per MMBtu on the March contract. On Friday, the price was straddling the 1.90 level. Natural gas worked its way into the gap from earlier in the week with a low at $1.861 erasing the void on the weekly chart.
Look for seasonal lows in March and April
While the price rebound in natural gas was overdue, the technical move did little to erase the prospects for an even lower low than the February 11 bottom in March or April.
The monthly chart shows that the target on the downside remains at the March 2016 low of $1.611 per MMBtu, the lowest price since the late 1990s. Inventory levels will go into the 2020 injection season at a significantly higher level than last year. Speculative shorts who took profits at the recent lows will likely return as sellers on any rallies, and some could add to existing risk positions. The bottom line is that the rally in natural gas was a little too late in the season. I continue to expect a lower low and a challenge of the 2016 bottom over the coming weeks before natural gas puts in a low for this year.
The United States Natural Gas Fund L.P. (UNG) was trading at $14.35 per share on Monday afternoon, down $0.45 (-3.04%). Year-to-date, UNG has declined -38.46%, versus a 21.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andrew 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.