- The price rose early
- Inventories are already higher than last year’s pre-withdrawal season level
- A bullish reversal on the daily chart- Buying weakness going into the winter months
Natural gas is a combustible commodity in its physical form, and the price often exhibits a wide price variance. There is a little over one month to go before the injection season ends, and stockpiles of the energy commodity begin to decline. The uncertainty of the temperatures during the winter often makes the late fall the most volatile time of the year.
Last year, the price of natural gas rose to a high of $4.929 per MMBtu in November. Early season cold weather and the lowest level of inventories in years combined to push the price to its highest level since 2014. This year, it does not appear that a move to that extent is in the cards for the natural gas market. However, the fickle weather can always provide surprises in the volatile natural gas arena. The United States Natural Gas Fund (UNG) replicates the price action in the natural gas futures market on a short-term basis. UGAZ and DGAZ ETN products are highly leveraged short-term trading tools.
The price rose early
After hitting bottom at $2.029 per MMBtu in early August, the price of nearby NYMEX natural gas futures recovered.
As the weekly chart highlights, the natural gas posted gains in five of six weeks from early August through mid-September, reaching a high at $2.71 per MMBtu. The price ran out of upside steam as price momentum, and relative strength indicators rose into overbought territory. At the same time, the total number of open long and short positions moved lower during the rally. Falling open interest and rising price tends not to be a technical validation of a bullish trend in a futures market.
The bottom line was that the price of natural gas rose too early with too much time left in the injection season, where stockpiles rise.
Inventories are already higher than last year’s pre-withdrawal season level
In 2018, stockpiles of natural gas in storage across the US rose to a high at 3.247 trillion cubic feet. The high was at the lowest level in years, which helped trigger the rally that took the price of the energy commodity to just under the $5 per MMBtu level in November when stocks begin to decline.
Last week, the market had expected an increase of around 100 billion cubic feet, but the EIA reported a higher injection in stockpiles of 112 bcf on October 3 as of the end of the previous week. The total amount of inventories rose to 3.317 tcf and surpassed last week’s peak with around six weeks left to go in the injection season.
The data should have been bearish for the natural gas futures market. However, the price action last Thursday and Friday was a warning that the market had become a bit too negative on the prospects for the price of the energy commodity.
A bullish reversal on the daily chart- Buying weakness going into the winter months
The kneejerk reaction to the EIA report and the rise in stocks above last year’s peak was a move to a low at $2.207 per MMBtu. However, the price quickly reversed.
As the daily chart illustrates, November natural gas futures put in a bullish reversal on October 3. The price traded to a lower level than during the previous session and closed above the prior day’s high. On Friday, October 4, the price traded up to a high of $2.398 and settled at over $2.35 per MMBtu.
Inventories have increased above the previous year’s high last week. However, the price action in the natural gas market was a reminder that the uncertainty of demand during the winter is likely to support the price of the energy commodity over the coming weeks. I continue to favor the long side of the natural gas market on price weakness.
The United States Natural Gas Fund L.P. (UNG) was trading at $19.58 per share on Tuesday morning, down $0.15 (-0.76%). Year-to-date, UNG has declined -16.04%, versus a 8.91% 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.