The price range in the natural gas futures market since 1990 has been from $1.02 on the downside to $15.65 per MMBtu on the upside. In March 2016, natural gas traded down to a low of $1.611 per MMBtu, and since then, it has recovered. Natural gas has been trading around the $3 level as of the end of last week after hitting a high of $3.994; the peak since 2014, in December 2016 and right now, I believe that any price under $3 will be a buying opportunity for the weeks and months ahead.
Natural gas closed last Friday at under the $3 level on the active month September NYMEX futures contract.
Source: CQG
As the daily chart shows, the September futures declined from highs of $3.5060 per MMBtu on May 12 to lows of $2.83 on July 5 and were trading closer to the lows than the highs on Friday, July 28, at $2.923 per MMBtu. There are four compelling reasons why I believe that natural gas is a raging buy on any price weakness over coming weeks. As we are now in the heart of the hurricane season, there is always a chance that a storm that sets its sites on the Gulf of Mexico could lift the price of the energy commodity. I am bullish for the coming winter season and am not counting on a storm but would not mind having a small core long position if one wanders into the Gulf over coming weeks. The bottom line when it comes to natural gas is that the energy commodity has a lot going for it these days as inventories, LNG, technical factors, and the trading history of natural gas all support higher prices in the months ahead.
Reason one: The level of inventory injections
On July 20, the EIA reported that natural gas inventories rose by only 28 billion cubic feet as of July 14. Last Thursday, it announced the injection was only 17 bcf. Inventories now stand at 2.99 tcf with 16 weeks to go in the 2017 injection season before the cold winter winds increase the demand for natural gas. Inventories are 9.2% last year’s level and only 2.9% above the five-year average for this time of the year. Over recent weeks, the five-year average comparison has been slipping and appears to be heading for a number that will eventually be negative.
In 2015, the amount of natural gas in storage rose above the 4 tcf level for the first time in recorded history. In 2016, stocks increased marginally to a new all-time high of 4.047 tcf before the start of the withdrawal season. To reach 4 tcf, the average injection over the next four months will need to be in the order of 63.2 bcf, and to post a new record, injections will need to average 66 bcf. A new all-time high may not be in the cards, and stocks above 4 tcf are becoming more elusive each week. Therefore, the first reason I believe the price of natural gas will eventually head higher is the current level of stocks and the trajectory of inventory injections.
Reason two: An underestimated demand vertical
Liquefication of natural gas has opened an entirely new demand vertical for the energy commodity. While discoveries of massive reserves of natural gas in the Marcellus and Utica shale regions of the United States depressed prices over past years, LNG is a likely answer that will avoid oversupplies. As a new business, there will be a ramp up period where shipments are likely to increase dramatically on a percentage basis. There are many areas of the world, especially in Asia and South America, that are anxious buyers of U.S. cargoes of LNG. I believe the potential for the LNG export market remains an underestimated demand vertical which will lift the price of the energy commodity as shipments increase over the coming months.
Reason three: A significant technical bottom
In March 2016, the price of natural gas fell to the lowest level since the late 1990s at $1.611 per MMBtu. Since the start of the NYMEX futures market, natural gas for delivery at the Henry Hub in Erath, Louisiana, has ranged from $1.02 to $15.65 per MMBtu. Prices over $10 were the result of Hurricanes Rita and Katrina that devastated the Louisiana Coast and are not likely to reoccur unless there is a natural disaster; prices above $4, $5, or even $6 remain a distinct possibility.
Source: CQG
As the weekly chart illustrates, the price of natural gas rose to almost $6.50 per MMBtu in during the winter of 2014 on a prolonged frigid period that caused inventories to decline rapidly. In 2013, going into the withdrawal season, stocks were at a high of 3.834 tcf in November and dropped to lows of 824 bcf in late March. With only 16 weeks to go in this year’s injection season, an average increase of 52.75 bcf would put stocks where they were at the beginning of the 2014 winter season when the price exploded to its most recent peak.
From a technical perspective, there is currently solid support at $2.522 per MMBtu, the February 2017 lows. Moreover, open interest in the natural gas futures market has declined from a record high of 1.574 million contracts during the week of May 8 to 1.317 million last week, a drop of 16.3%. Falling price alongside a drop in open interest is not typically a sign of an emerging bearish trend in a futures market. Technically, natural gas is in a perfect position to move higher in the months ahead. And, it has a long history as one of the world’s most combustible and volatile futures markets.
Reason four: The most combustible commodity when it comes to price volatility
Natural gas tends to attract a large number of speculative market participants because of its penchant for price variance.
Source: CQG
Weekly historical volatility in natural gas futures was at the 28% level at the end of last week. As the chart shows, the statistical metric is a lot closer to the lows than highs. Natural gas has a habit of trading at volatility levels above 50%; in 2014, the metric reached almost 100%. Historical volatility has been trending lower since the beginning of 2017, and it has declined to a level where there is a lot more upside potential than the downside.
There are four reasons why I believe the coming winter season will see a higher high in natural gas compared to last December’s peak at $3.994 per MMBtu. With the price now under $3 on the nearby September futures contract, and at the $3.30 level on January futures, I believe we will see prices above $4 per MMBtu at some point this winter. While $4 is a good move on a percentage basis, the potential for even higher prices at $5 or even $6 per MMBtu is certainly possible. That is why I am a buyer of the energy commodity at prices below the $3 level on the nearby futures contract that trades on the New York Mercantile Exchange.
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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 futures, options, ETF/ETN products, and equities. Those long and short tend to change on an intraday basis.
Source: CQG
