- The price grinds lower
- A sitting duck
- Sellers above waiting for a recovery
It is now a new year and the 2020s, which means that the holiday season is over. We are already into the heart of the winter season, which is the peak time of the year for heating demand across the United States. During the approach of the 2018/2019 heating season in the natural gas market, the price rose from a low of $2.704 per MMBtu in mid-July to a high of $4.929 in mid-November. By early January 2019, the price of the energy commodity had declined below the $3 level.
During the 2019/2020 season, both the low and the high were at lower levels. The bottom in August was $2.029, and the top in early November was $2.905 on the continuous futures contract. Higher inventories in 2019 compared to 2018 caused a lower low in the summer by 67.5 cents and a lower high at the start of the withdrawal season of $2.024 per MMBtu. While the price was down below $3 in January 2019, it was coming closer to the $2 level on the first trading days of 2020.
The United States Natural Gas Fund (UNG) is the ETF product that tracks the price of the natural gas futures market.
The price grinds lower
Over the first two trading sessions of 2020, the price of natural gas made lower lows, in a pattern that had become all too familiar since November. On November 5, the February NYMEX natural gas futures contract reached a peak of $2.926 per MMBtu, and over the two months, the price has done little but decline.
The daily chart reflects the steady bearish grind that took the energy commodity to its latest low of $2.083 on Friday, January 3, after reaching a slightly higher new low of $2.116 per MMBtu on January 2.
There have been no price spikes on the downside, only the slow drip of losses. Price momentum and relative strength indicators were in oversold territory at the end of last week, but both continued to trend lower with room to decline. Daily historical volatility at 33.58% was at the lower end of its range since November 2019. Meanwhile, the total number of open long and short positions in the natural gas futures arena stood at around 1.32 million contracts as of January 2. The open interest metric climbed from 1.18 million on November 5 when natural gas was on its high at over the $2.90 level. The rise of 140,000 contracts or 11.9% when the price declined tends to be a technical validation of a bearish trend in any futures market.
A sitting duck
After grinding lower for the past two months, natural gas futures are looking like a sitting duck just waiting for shorts to appear and blow them out of the water and right through the $2 level on the nearby futures contract. The price was coming closer last week as the March futures contract traded to a low of $2.062 on Friday.
As the quarterly chart illustrates, the only thing that stands between the current price and the March 2016 low is the August 2018 bottom and current level of critical technical support at $2.029 per MMBtu. While $2 is a psychological level, the target is now at $1.611. Natural gas traded that price in 2016 for the first time in this century. The 1998 low was only one tick below at $1.610 per MMBtu.
Sellers above waiting for a recovery
The island reversal on the weekly chart remains a juicy target for those looking for natural gas to stage a comeback, but it is fading in the market’s rearview mirror.
The chart shows the November technical formation that left a gap on the chart from $2.738 to $2.753 per MMBtu. Price action tends to fill gaps in futures markets. However, now that we are in January, the market is looking towards the spring and the bearish tone of the market means that sellers are lurking above the market.
Any attempt at a rally over the coming weeks would likely attract speculative selling to keep the bearish party going.
The price action in natural gas continues to favor the downside. At the start of January, the odds seem to point to a test of the $1.611 level rather than a move back to the gaps on the weekly chart.
The United States Natural Gas Fund L.P. (UNG) was trading at $16.48 per share on Monday morning, up $0.09 (+0.55%). Year-to-date, UNG has declined -29.33%, versus a 21.32% 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.