- Natural gas moved marginally higher
- Nowhere near technical resistance- A level to watch at the end of August
- Inventories rise slowly
NYMEX natural gas futures traded to a low at $2.029 per MMBtu on the September contract at the start of August. Since then, the energy commodity has been struggling to recover. At just over the $2 level, natural gas reached its lowest price since May 2016.
Last November, the price of nearby natural gas futures rose to a high at $4.929 per MMBtu as the injection season turned to the time of the year when the amount of gas in storage around the US declines. With thirteen weeks to go before the start of the peak season for demand, the price began to show some signs of bullish life last week. However, natural gas could not challenge any significant technical levels on the upside.
The United State Natural Gas Fund (UNG) is an unleveraged product that tracks the price of the NYMEX futures market. The UGAZ and DGAZ triple-leveraged products turbocharge the short-term price action on the up and downside in the volatile energy commodity. However, the leverage comes at a price, which is time decay. Therefore, both price direction and timing are critical when it comes to using tools like UGAZ and DGAZ.
Natural gas moved marginally higher
Natural gas rallied over the past week as the price stopped short of the $2 per MMBtu level and reversed.
As the daily chart of September futures highlights, the price of gas fell to the lowest price since 2016 at $2.029 per MMBtu on August 6 and has recovered. Last week, the price traded to a peak at $2.267 on August 14, 11.7% above the low. On Friday, the price of the nearby futures contract settled at $2.20, a lot closer to the high than the recent low. On August 13, the price put in a bullish reversal on the daily chart and followed through on the upside. However, the daily chart illustrates that the pattern of lower highs and lower lows remains intact despite the recent price recovery.
Nowhere near technical resistance- A level to watch at the end of August
The longer-term chart for the energy commodity continues to paint an ugly picture for the price.
If the price of natural gas closes below the $2.239 level at the end of this month, it will mark the ninth consecutive month of losses in the futures market. The last time natural gas posted a month-on-month gain was in November 2018 when the price rose to the highest level since 2014. Price momentum and relative strength metrics both display oversold conditions. Open interest, the total number of open long and short positions in the futures market has been gently rising since February. Increasing open interest and falling price tends to be a technical validation of a bearish price trend in a futures market. Monthly historical volatility at almost 64% has remained at an elevated level since late last year.
One of the reasons why natural gas exploded to the upside last November was that the amount in storage was the lowest in years. The peak season for demand tends to run from November through March each year.
Inventories rise slowly
Natural gas moved into the 2019 injection season with stockpiles at the low level of 1.107 trillion cubic feet in March. Stocks rose steadily through June, but on June 14, the Energy Information Administration reported the last injection of over 100 billion cubic feet. Since then, demand for cooling during the hottest part of the summer limited the flow into storage.
Last week, the market had expected an injection of around 55 billion cubic feet. When the EIA reported that stocks rose by only 49 bcf, the price took off to the upside and hit the high for the week at $2.267 per MMBtu. However, to break the pattern of lower highs, natural gas will need to rise above the August 1 peak at $2.333 per MMBtu. On a longer-term basis, critical technical resistance is at just over the $2.50 level, which was the low in both 2017 and 2018.
I believe that natural gas will eventually reach that level as the peak winter season approaches. Last year, the rally started because stocks rose to only 3.247 trillion cubic feet in November. An average injection of 39.2 bcf is necessary to reach that level over the next thirteen weeks. There will likely be 3.5 to 3.7 tcf in storage at the start of the 2019/2020 peak season, which is still a historically low level.
Now could be the perfect time to begin scale-down buying in the natural gas market for the coming winter season. The price of January futures settled at $2.558 last Friday, which is the peak price for the coming winter season. The odds favor an eventual rally to higher prices. As the summer ends the coming fall and winter seasons will remind market participants that natural gas is one of the most volatile commodities. Concerns about stocks in case of a cold winter will cause buying to return to the natural gas futures market.
The United States Natural Gas Fund L.P. (UNG) was trading at $19.00 per share on Wednesday morning, down $0.24 (-1.25%). Year-to-date, UNG has declined -18.52%, versus a 10.02% 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.