- Natural gas makes lower lows, but recovers on January 10
- Open interest is rising- A bearish sign
- How low can it go?
In November 2018, the price of nearby natural gas futures on the NYMEX division of the CME rose to a high of $4.929 per MMBtu. By the end of the second week of January 2019, the price was trading at $3.423, 30.6% below the high, and on its way to a low of $2.029 in August last year, the lowest price since 2016 and 58.8% below the 2018 peak.
This year, the high in natural gas was at $2.905 per MMBtu. At the end of last week, natural gas was trading at $2.202, 24.2% below the high at the very start of the winter season. Last year the price more than halved from the peak in November. The same percentage move in 2020 would take the price of the energy commodity below $1.45 per MMBtu, a price not seen since 1995 when natural gas reached $1.25 per MMBtu. The price action in the futures market has been bearish this winter, and it could get ugly in the spring. The futures market is now in the process of rolling risk positions from February to March.
The United States Natural Gas Fund (UNG) moves higher and lower with the price of nearby NYMEX natural gas futures. Over the past week, both the futures market and the ETF product were snoozing. All of the volatility was in the oil market.
Natural gas makes lower lows, but recovers on January 10
The technical picture for the natural gas futures market looked like a recovery was in the cards at the end of last week.
As the daily chart highlights, the price of natural gas fell to a low of $2.083 on January 3. The low was just 5.4 cents above the August continuous contract low of $2.029, which was a level not seen since back in 2016. The price momentum and relative strength indicators both fell into oversold territory, but a modest recovery last week caused both measures to cross higher. Natural gas traded above the $2.20 per MMBtu level for the first time in 2020 on January 10 when the price rose to a high of $2.234 and settled the week at $2.202 per MMBtu.
Open interest is rising- A bearish sign
Open interest measures the total number of open long and short positions in a futures market.
The daily chart illustrates that the open interest stood at 1,175,753 contracts on November 5, 2019, the day that the price of February futures reached a high of $2.926 per MMBtu. As of January 9, the metric was at 1,386,202 contracts, with the price over 70 cents per MMBtu lower. The rise of 210,449 contracts or 17.9% over the past three months tend to be a validation of a bearish price trend in a futures market.
The island reversal that is hovering above the market from $2.781 to $2.786 is a tempting reason for a long position. The temptation could rise after last week’s modest recovery. However, with inventories 19.8% above last year’s level and 2.4% above the five-year average as of the beginning of January, and the weather conditions warmer than average, the odds that sellers are lurking above the current price are high.
How low can it go?
There are approximately eleven weeks to go until the winter ends, and natural gas inventories begin to rise. Last year, stocks hit a low of 1.107 trillion cubic feet in late March. This year, with stocks at 3.148 tcf as of January 3, they will not come anywhere near that level on the downside. Therefore, fundamentals continue to favor lower prices.
The first target on the downside is the August low of $2.029. While the $2 per MMBtu will serve as psychological support, the technical target stands at the March 2016 low of $1.61 per MMBtu. I continue to believe that any rally over the coming days and weeks will create an opportunity to sell natural gas on a scale-up basis as sub-$2 prices are on the horizon. Below the March 2016 bottom, the next level of support is only one tick lower at $1.61, the low from way back in 1998. In 1995, natural gas futures traded to a bottom of $1.25 per MMBtu.
The current problem for natural gas is timing. The futures market is now looking towards the spring season when stockpiles begin to rise. Over the coming days and weeks, the February futures contract will roll to March.
The chart represents the price of February minus March NYMEX natural gas futures. At a 3.50 cents discount for the March futures, the market expects lower values for the deferred contract. The spread between March and April, the next roll period has a nickname, which is the “widow-maker” as it reflects the period when withdrawals end and injections begin. We could see lots of volatility in the spread over the coming days as the contract rolls. Support for March futures is at the January 3 low of $2.062 per MMBtu.
We could see lots of volatility in the natural gas arena over the coming days and weeks. My guess is that sellers will pounce on any attempt at a rally.
The United States Natural Gas Fund L.P. (UNG) was trading at $16.79 per share on Monday afternoon, down $0.25 (-1.47%). Year-to-date, UNG has declined -28.00%, versus a 23.14% 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.