- A new low and a bounce
- A larger than expected injection weighs on the price- A bearish reversal on the weekly chart
- Natural gas still has a while to go before bullish seasonality kicks in
At the beginning of last week, it looked like the natural gas market had run out of selling. During the week of July 22, the price of nearby futures fell to a low at $2.165 per MMBtu which was a marginally higher low compared with the bottom from the week of June 17 at $2.159.
The natural gas market is in the heart of the injection season when inventories grow in preparation for the peak season of the demand during the winter months. Meanwhile, since natural gas has replaced coal in power generation, when temperatures rise during the summer and demand for cooling rises, injections into storage tend to decline. The last injection of over 100 bcf occurred in mid-June, and up until Thursday, August 1, each injection had been lower than the prior week. Falling injections did little to support the price of the energy commodity, which revealed the bearish tone in the market.
Last week, the price of natural attempted to move to the upside, but it failed. The United States Natural Gas Fund, LP (UNG) is a liquid non-leveraged product that reflects the price action in the NYMEX natural gas futures market.
A new low and a bounce
On Monday, July 29, the price of nearby natural gas futures fell to a low at $2.101, which was a new low for the energy commodity. The price turned higher, and by early Thursday, it rose to $2.333 per MMBtu, a rise of over 11%.
Source: CQG
As the daily chart of September futures highlights, after the price ran out of selling last Monday, the buying dried up on Thursday. The market had expected another small injection into inventories after five consecutive weeks of falling inventory builds. I had thought that the Energy Information Administration would report a rise of only 40 billion cubic feet on Thursday, August 2, but along the with rest of the market, I was wrong.
A larger than expected injection weighs on the price- A bearish reversal on the weekly chart
On Thursday, August 1, all eyes were focused on two issues as the US slapped new tariffs on China. The price of crude oil suffered its most substantial loss in four years. Nearby NYMEX crude oil futures declined by over $4 per barrel during the first trading session of August. When the EIA reported that natural gas inventories rose by a higher than expected 65 bcf, the price fell like a stone from over the $2.30 per MMBtu level.
Source: CQG
The weekly chart shows that after rising to a new short-term high, the price fell to a new long-term low when it traded to $2.077 on August 7 and settled the week at $2.121. The price action during the week resulted in a bearish reversal trading pattern, which could encourage selling over the coming days.
Natural gas still has a while to go before bullish seasonality kicks in
The peak season of demand in the natural gas market will start in early to mid-November when injections into storage shift to withdrawals. While the futures markets will soon shift into winter mode, there is still over around fourteen weeks left where stockpiles will rise. Last year, inventories rose to a high at 3.247 trillion cubic feet, which was the lowest level in years and led to the most significant rally since 2014. Natural gas rose to a peak at $4.929 per MMBtu in November 2018. A weekly average injection of 40.9 billion cubic feet is necessary to eclipse last year’s peak.
The odds favor a higher starting point for inventories during the 2019/2020 peak season. However, the recent injections could mean that stocks may not rise appreciably above last year’s level. Meanwhile, the trend in the natural gas futures market remains lower. As of Friday, August 2, the peak price for the coming winter is at $2.546 per MMBtu on the January futures contract. Any spike to the downside that challenges the $2 level could present a buying opportunity for the winter season. Eventually, the price of natural gas will reflect the uncertainty of the weather in December through March. The current price pattern could lead to some bargains on the horizon when it comes to the price of the energy commodity.
The United States Natural Gas Fund L.P. (UNG) was trading at $18.12 per share on Wednesday afternoon, down $0.17 (-0.93%). Year-to-date, UNG has declined -22.30%, versus a 8.22% 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.
This article is brought to you courtesy of ETFDailyNews.com.
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.
