- A bearish winter season
- The spring could get worse
- The summer could see natural gas react to politics in the US
The 2019/2020 peak season for demand in the natural gas futures market began in early November when the price of the nearby NYMEX futures contract rose to a high of $2.905 per MMBtu. The high level of inventories, compared to the previous year, caused the price to fall far short of its peak during the 2018/2019 withdrawal season. In November 2018, the lowest level of stockpiles in years pushed the price of natural gas to a high of $4.929 per MMBtu, the highest level since February 2014.
In 2018, a significant short position in natural gas and a long position in crude oil in October and November pushed the price of gas higher and oil lower as the market participants scrambled to unwind their risk positions. In late 2019 and early 2020, a combination of high stocks and below-average demand pushed the price to its lowest level since 2016. The United States Natural Gas Fund (UNG) is the ETF product that tracks the price of nearby natural gas futures on NYMEX.
A bearish winter season
At the start of the 2019/2020 peak season for demand in the natural gas market, the price rose to a high of $2.905 per MMBtu on the nearby NYMEX futures contract. The price never made it to the $3 level as inventories moved into the winter at 3.732 trillion cubic feet in November 2019 compared to 3.247 tcf at the same time in 2018. The differential of 485 billion cubic feet meant there would be plenty of supplies to meet the demand during the coldest months of the year.
As the weekly chart highlights, the price of natural gas has declined steadily over the past three months. At the end of last week, nearby futures fell to a low of $1.812 per MMBtu, the lowest price in January since way back in 1999. Price momentum and relative strength indicators were in deeply oversold territory at the end of January. The total number of open long and short positions rose from 1.160 million contracts at the beginning of November to 1.492 million contracts as of January 30. Increasing open interest and falling price typically validates a bearish price trend in a futures market.
The spring could get worse
As we are now in February, it will not be long before the spring season begins. There were approximately eight weeks to go in the withdrawal season in the natural gas market, and inventories would have to decline by an average of around 205 billion cubic feet a week to reach last year’s low in stockpiles at 1.107 tcf. Since we have not seen a withdrawal at that level yet this year and declines in inventories tend to move lower as the spring approaches, we will not see the amount in storage come anywhere near last year’s low.
In March 2016, the price of natural gas fell to a low of $1.611 per MMBtu, before recovering. The price was the lowest level since 1998 when it dropped just one tick lower to $1.610 per MMBtu. Given the current price trend, record production in the US, bearish sentiment in the market, and inventory levels going into the injection season, we could even see the price drop lower than the 1998 bottom. If the trend is your friend going into the spring, we could be in for a continuation of lower lows over the coming weeks.
The summer could see natural gas react to politics in the US
Fundamental and technical factors in the natural gas futures arena could take a backseat to politics during the summer and fall of 2020. The US election will not only stand as a referendum on President Trump’s performance but on the future of energy policy in the United States. The opposition party is likely to adopt the “Green New Deal” as part of its platform. Natural gas and oil output rose significantly over recent years. Technological advances in extracting the energy commodity from the crust of the earth played a role in the growth in production. However, regulatory reforms and initiatives that supported energy independence under the Trump administration turbocharged output. A change in US energy policy could cause a significant decline in production if a Democrat wins the White House in November 2020.
We could see natural gas prices begin to move with the political polls during the second half of 2020. With the price heading for the lowest levels of this century, the risk-reward will favor the upside if politics begins to trump other factors in the natural gas market later this year.
The United States Natural Gas Fund L.P. (UNG) was trading at $14.31 per share on Tuesday morning, up $0.10 (+0.70%). Year-to-date, UNG has declined -38.64%, versus a 23.60% 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.