Time is Running Short for the Natural Gas Market

 

  • Estimize expected a 93 bcf withdrawal
  • Natural gas continues to struggle
  • Time is running short

 

Energy markets were wild this week. The price of nearby NYMEX crude oil futures traded in a range from $59.15 to $65.65 per barrel since January 3. The tensions in the Middle East translated to a wide range in the oil market. Meanwhile, the price of natural gas was almost unconscious. Over the same period, the range in the active month February futures was from $2.083 to $2.185 per MMBtu. Natural gas was sitting not far off its lows in the February contract when the Energy Information Administration released its weekly inventory data at 10:30 AM EST on Thursday, January 9.

The United States Natural Gas Fund (UNG) is the ETF product that moves higher and lower with the price of the futures market on NYMEX. Oil got all the attention over the past week, while natural gas was little more than an afterthought as the price continues to sit near the lows.

 

Estimize expected a 93 bcf withdrawal

According to Estimize, a crowdsourcing platform, the market had been looking for a withdrawal of 92-93 billion cubic feet from storage in the natural gas market for the week ending on January 3, 2020. On January 9, the Energy Information Administration reported that stockpiles only declined by 44 bcf.

(Source: EIA)

As the chart highlights, total inventories in storage across the US stood at 3.148 trillion cubic feet of natural gas. The high level of stocks that are 19.8% above last year’s level and 2.4% above the five-year average for this time of the year account for the continued price weakness in the natural gas futures market. While the withdrawal from inventories was less than half the level the Estimize website anticipated, the price action tells us that the market had expected a small decline in stocks for the week ending on January 3.

(Source: CQG)

The ten-minute chart illustrates that the price initially slipped to a low of $2.1050, it came back to the $2.15 level in the aftermath of Thursday’s EIA report.

 

Natural gas continues to struggle

The bearish price action in the natural gas futures market continued after the release of the latest inventory data.  

(Source: CQG)

The daily chart of February futures shows that natural gas continues to sit near its recent low of $2.083 per MMBtu. Both price momentum and relative strength indicators are hovering around oversold conditions, and daily historical volatility has been declining. The metric moved from almost 50% in early December to under 28% on January 9.

Meanwhile, the total number of open long and short positions in the natural gas futures market has been rising with the weak price action. The metric moved from 1.176 million contracts on November 5 when February futures were above the $2.90 level to 1.366 million as of January 8. The increase of 190,000 contracts, while the price fell, tends to be a validation of a bearish trend in a futures market. The rise in open interest in the natural gas futures market suggests that more shorts are coming to the market as the price continues to trend to the downside.

 

Time is running short

In 2019, the withdrawal season ended on March 22 with inventories at 1.107 trillion cubic feet. As of January 3, there are now around eleven weeks before stocks begin to rise as natural gas flows into storage around the US. To reach last year’s level at the beginning of the injection season, the average weekly withdrawal will need to be around the 185.5 billion cubic feet level over the coming 11 weeks. Reaching that level in stocks is more than unlikely because of the warm temperatures across the US so far this winter season, which reduces the demand for heating and the energy commodity. Moreover, the most significant withdrawal so far during the 2019/2020 season has been 161 bcf.

Time is running short for the natural gas market, and the odds of a move below the $2 level are rising. The latest inventory report from the EIA on January 9 may only embolden the bears to keep pressure on the market over the coming days and weeks.

 


The United States Natural Gas Fund L.P. (UNG) was trading at $16.57 per share on Thursday afternoon, down $0.06 (-0.36%). Year-to-date, UNG has declined -28.95%, versus a 22.69% 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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