Why is Natural Gas So Volatile?

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December 2, 2019 1:11pm NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • A decline as December futures roll to January
  • Lots of winter left but a bearish reversal on the weekly chart
  • A bucking bronco knocking the bulls off their positions as shorts pile in

When I looked outside my window in the western suburbs of Las Vegas on Wednesday morning, November 27, light snow was falling in the desert. Snow is not a typical weather event in southern Nevada, so it turns more than a few heads when it occurs. Last year, the first snowstorm in years caused almost panic, given the lack of snowplows in sin city. Meanwhile, during the Thanksgiving holiday, snow and cold weather gripped most of the US, causing travel delays and nightmares on roads and at airports across the United States.
On that Wednesday morning, when I turned on my computer screen to check the markets, the price action in natural gas was made me think it was an early summer rather than winter. The day after the holiday the price of peak-season January futures on NYMEX slipped below $2.30 per MMBtu for the first time since August.

The United States Natural Gas Fund (UNG) is the ETF product that tracks the price of nearby natural gas futures.

A decline as December futures roll to January

December futures in the NYMEX natural gas market rolled to the peak-season January contract last week.

(Source: CQG)

The daily chart highlights the decline in January futures from $2.98 on November 5 to a low at $2.27 per MMBtu on November 29. Price momentum and relative strength indicators declined into oversold territory, and daily historical volatility spiked to almost 50%, which could be a sign that a recovery is overdue.

Meanwhile, the rise in the total number of open long and short positions from 1.176 million on November 21t o 1.245 million contracts at the end of last week is a bearish sign for the futures market. Rising open interest and falling price tend to be a technical validation of a bearish trend in a futures market. At the same time, January futures put in a bearish reversal on the daily chart on November 25 as they rose to a higher high than on November 22 and closed below the previous session’s low. Additionally, the island reversal between $2.826 and $2.829 in the January futures continues to stick out like a sore thumb above the current price level.

Lots of winter left but a bearish reversal on the weekly chart

We are at the very beginning of the winter season. If the demand for heating rises because of below-average temperatures, the price of the energy commodity could recover from its current oversold condition. However, the price action last week put in a bearish reversal on the weekly chart.

(Source: CQG)

The weekly pictorial illustrates the bearish technical pattern that could encourage speculative shorts to keep pushing the price of natural gas lower over the coming days and weeks.

A bucking bronco knocking the bulls off their positions as shorts pile in

Natural gas, in its physical form, is a highly combustible energy commodity. When it comes to price volatility, natural gas has a long history of price explosions and implosions. The current price action has taken the wind out of the sails of anyone holding a long position. However, at this time of the year at the very beginning of the winter season, the pain inflicted on the bulls could quickly turn and cause the same degree of financial woes for those holding short positions for technical reasons.

Trading natural gas can be like riding a psychotic horse through a burning barn at times as the price action can overextend on the up and the downside. The trend in natural gas can change on a dime as the price action tends to be as fickle as the next weather report.

At the end of November, the price action did not reflect seasonal factors, but that does not mean the environment cannot change in the blink of an eye over the coming days and weeks.

The United States Natural Gas Fund L.P. (UNG) was trading at $17.90 per share on Monday afternoon, up $0.07 (+0.39%). Year-to-date, UNG has declined -23.24%, versus a 17.20% 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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