Will Natural Gas Fall Even Lower?

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January 24, 2020 12:30am NYSE:UNG

NYSE:UNG | News, Ratings, and Charts

  • New lows in natural gas this week
  • The market expected a withdrawal of 92 bcf from storage
  • Natural gas looks set to test the 2016 low

 

In November 2019, the price of nearby NYMEX natural gas futures rose to a high of $2.905 per MMBtu. The market ran out of buying at the start of the 2019/2020 winter season when stockpiles decline across the United States. The low level of inventories at the beginning of the 2018/2019 peak season for demand took the price to a high of $4.929 in November 2018. With stockpiles 485 billion cubic feet above the previous year in November 2019, natural gas did not make it to the $3 level at the beginning of this winter.

On the way lower, natural gas left a gap on the weekly chart from $2.738 to $2.753 in November, which continues to stand as a void. Meanwhile, the price moved steadily lower through December and January, and this week, another gap developed on the chart. Natural gas traded to a low of $1.994 on Friday, January 17, and it put in a bearish reversal trading pattern on the weekly chart. The high price for the week of January 21 was $1.98 per MMBtu, as of Thursday, January 23, creating another gap. Natural gas has ignored gaps, which often act as magnets for price action. The price of February natural gas futures was below the $2 level as the Energy Information Administration released its weekly inventory data on Thursday, January 23. The United States Natural Gas Fund (UNG) follows the price of the energy commodity lower. In the current environment, the leveraged Velocity Shares 3X Inverse Natural Gas ETN product (DGAZ) turbocharged profits for bears looking for lower prices.

New lows in natural gas this week

After last week’s bearish reversal, the price followed through on the downside at the start of this week as the price gapped lower on the open Sunday night and fell to $1.83 per MMBtu on the February contract.

(Source: CQG)

The monthly chart highlights the last time natural gas traded at such a low level in January was back in 1999, over two decades ago. In January 1999, the energy commodity futures hit a low of $1.695 per MMBtu during the first month of the year during the peak of the winter season. Instead of looking down at the $2 level as a psychological level of support, the natural gas futures market is looking up at what is now resistance.

 

The market expected a withdrawal of 92 bcf from storage

The EIA delivered what the market had expected on Thursday, when it reported that natural gas inventories fell by 92 billion cubic feet for the week ending on January 17.  

(Source: EIA)

As the chart shows, stockpiles stood at 2.947 trillion cubic feet, 23.2% above last year’s level, and 9.3% above the five-year average for this time of the year. The market’s reaction to the latest EIA data was a continuation of the bearish price action.

 (Source: CQG)

The ten-minute chart shows that while February futures rose to a high of $1.98 and worked its way into the gap between $1.97 and $1.994, it did not completely fill the void. The price proceeded to drop back into the low $1.90s in the aftermath of the data release.

 

Natural gas looks set to test the 2016 low

While the January 1999 low of $1.695 per MMBtu is a significant January low, the target on the downside is now critical support at the March 2016 bottom.

( Source: CQG)

As the monthly chart illustrates, the trend-following shorts will now set their sights on the March 2016 low of $1.61 per MMBtu over the coming weeks.

The natural gas market is in oversold territory, and the rising number of shorts could trigger an upside correction. However, the tone of the market points to selling on any attempt at higher prices in the current environment.

 


The United States Natural Gas Fund L.P. (UNG) . Year-to-date, UNG has declined -35.93%, versus a 24.80% 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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