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Natural Gas Remains Weak – A Buying Opportunity For The Coming Weeks (NYSEARCA:UNG)

November was a rough month in the natural gas market. After reaching a high of just over $3.50 on the active month January NYMEX futures contract on October 30, the price was on the defensive throughout November. January natural gas futures fell to a low of $2.656 per MMBtu on November 19, which wound up being the low. At that level, natural gas traded below the price of January futures in late June when they bottomed at $2.778, while the nearby contract reached a twenty-five-year low of $1.432. Seasonality accounted for the premium for the January contract in late June.

After recovering to just over $3 at the end of last month, the beginning of December has seen a return of selling, pushing the price to a new low as the market headed into the Energy Information Administration’s weekly inventory report.

The United States Natural Gas Fund (UNG) is the unleveraged ETF product that tracks the price of natural gas futures that trade on the CME’s NYMEX division.

The market expected a 23 bcf withdrawal from storage for the week ending on November 27

According to Estimize, a crowdsourcing website, the natural has market expected the EIA to report a withdrawal of 23 billion cubic feet of natural gas from storage for the week ending on November 27.

Source: EIA

As the chart shows, the withdrawal came in far lower than the market had projected, with only one bcf flowing out of storage across the United States at the end of last week. Total stocks were 3.939 trillion cubic feet, 9.5% above last year’s level and 7.9% over the five-year average for the end of November.

The report was bearish for the natural gas price, but it had already dropped before the latest inventory data.

Source: CQG

As the ten-minute chart on December 3 illustrates, the price had already dropped when the EIA released its report on stockpiles as of November 27.

Another lower low in the energy commodity

January futures settled at $2.78 per MMBtu on Wednesday, December 2. The natural gas price fell to another new low on the nearby contract even before the EIA’s bearish data release on Thursday.

Source: CQG

As the daily chart highlights, January natural gas fell to a low of $2.778 in late June when nearby futures reached a quarter-of-a-century low. The price made a lower low on November 19 at $2.656 per MMBtu. After a recovery to a lower high at just above $3, the price action on December 3 sent January futures to below the $2.50 per MMBtu level, a new low. The price had been falling before the inventory report, and the bearish data was a fundamental validation of the price action.

The total number of open long and short positions in the natural gas futures market had been falling since mid-November as natural gas continued to make lower highs. The metric moved from 1.259 million contracts on November 16 to a low of 1.200 million on November 25. Over the recent sessions, the metric has been rising as trend-following shorts could be returning to the market in the face of the technical breakdown.

Price momentum and relative strength indicators are trending lower and are in oversold territory. At over 61%, daily historical volatility is at its highest level in 2020, reflecting the wide daily price ranges.

Meanwhile, the price of the energy commodity moved further away from the gap from $3.022 to $3.074 that occurred in mid-November.

Natural gas peaked too early and fell prematurely – the quarterly chart still looks constructive

While the natural gas market’s short-term trend remains highly bearish on December 3, the longer-term chart could be telling us that natural gas is now in the buy zone. With the nearby futures at around $2.51 and the low end of the gap on the daily chart over 20% above the current market price, risk-reward could favor a recovery.

Source: CQG

The quarterly chart displays that a close above $2.545 per MMBtu at the end of December would mark the third consecutive quarter of gains in the natural gas price. Open interest has been mostly stable through 2020. Meanwhile, the slow stochastic, a price momentum indicator, was crossing higher in oversold territory despite the recent selling in the natural gas futures market. The relative strength indicator was sitting at just below a neutral reading. Quarterly historical volatility at over 36% is at its highest level since July 2018. While the short-term trend is bearish, the longer-term natural gas chart is flashing not so fast.

As the market was heading into the peak season for demand in October, the price peaked at almost the $3.40 per MMBtu level on the continuous contract earlier than in the past years, even though stockpiles were at far higher levels. Meanwhile, the selling is now occurring a bit prematurely, given that we are only at the beginning of the heating season and winter does not officially start until December 21, over two weeks from today.

While weather tends to be the most influential factor for the natural gas market as the winter season arrives, 2020 is no ordinary year for the energy commodity.

Politics could lift natural gas

The January 5 runoff election for two US Senate seats in Georgia will determine if Democrats or Republicans control the Senate in 2021. President-elect Biden’s agenda will have clear sailing through the House and Senate if the two seats go to the Democrat as it would create a 50-50 tie with the deciding vote going to Vice President-elect Harris. Meanwhile, a Republican majority would require some compromise on the President-elect’s plans.

The Democrats favor a greener path for US energy policy. Just how green will depend on the outcomes in Georgia. It is safe to say that stricter regulations are on the horizon for US oil and gas producers. However, a sweep by the two Democrats in Georgia could prompt limits or bans on fracking. As US energy policy shifts, the US will extract fewer fossil fuels from the earth’s crust. The global demand for LNG continues to rise. In a post-COVID-19 world, both US and worldwide energy demand should increase. The change in US energy policy could create shortages in the natural gas market.

In 2020, stockpiles reached a high of 3.958 trillion cubic feet at the start of the peak demand season. This year’s high could stand as a peak for inventories over the coming years under the Biden administration, which is fundamentally bullish for the price of the energy commodity.

UNG is the natural gas ETF product

Meanwhile, the price action in natural gas remains bearish, and the trend is lower as of December 3. At the very beginning of the demand season, natural gas may be falling too low too soon, just as it rallies too high too soon in October.

I favor a long approach to the natural gas market at the $2.50 level and would add to long positions on a scale-down basis over the coming weeks. I would not hold any long positions longer than early January, after the election. I continue to believe that the price of January futures will move towards filling November’s gap on the daily chart that is around 50 cents above the current price.

The fund summary and top holdings of the United States Natural Gas Fund (UNG) include:

Source: Yahoo Finance

UNG has net assets of $345.49 million, trades an average of over 4.5 million shares each day, and charges a 1.33% expense ratio. The ETF product is not leveraged and holds May futures contracts.

Source: Barchart

The chart shows that, with the price at the $2.44 level on December 3, the void on the chart is from $2.811 to $2.836, over 15% above the current price level.

I believe risk-reward favors buying natural gas at its current price level and adding to long positions on a scale-down basis on further price weakness. Going against a trend requires holding one’s nose and taking a leap of faith. However, the chart’s gap, the shifting political landscape in the US, and the oversold level of the energy commodity are reasons why we should see another price recovery sooner rather than later.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from a top-ranked author in commodities, forex, and precious metals. My weekly report covers the market movements of over 20 different commodities and provides bullish, bearish, and neutral calls; directional trading recommendations, and actionable ideas for traders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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