UNG: A Bumpy Ride as Storms Face Inventories

An early-week rally on Tropical Storm Delta heading for Louisiana
Inventories remain near a record high
Lower highs and lower lows but technicals and stocks take a back seat to storms that threaten the Henry Hub

The 2020 hurricane season has been active. The past three significant storms headed for the Gulf of Mexico and the Louisiana coast. In early September, Hurricane Laura pushed the November NYMEX natural gas futures price to a high of $3.002 per MMBtu. Towards the end of the month, Hurricane Sally was the second storm of the season. The approach of Sally pushed the November futures contract to a high of $2.928 on September 24.

The most recent storm, Hurricane Delta, was charging towards the US Gulf Coast last week. So far, the threat to energy production sent the price of November natural gas futures to a high of $2.821on October 9.

The Henry Hub is the delivery point for NYMEX natural gas futures. The Hub is in Erath, Louisiana, not far from the Gulf of Mexico. In 2005 and 2008, Hurricanes Katrina and Rita sent the natural gas futures price above $10 per MMBtu. In 2005, the energy commodity rose to its highest level in history at $15.65 per MMBtu.

Meanwhile, natural gas has not traded north of $6.493 since 2008. At below $3, the price remains under pressure.

Massive discoveries of natural gas reserves in the Marcellus and Utica shale regions and fewer regulations have increased supplies of the energy commodity over the past years.

While storms that threaten natural gas infrastructure can still push prices higher, they remain at very low levels. As we head into the peak season for demand during the winter months, the amount of natural gas in storage is approaching record levels in the US. So far, even though the hurricane season has caused periodic rallies, the highs continue to be lower as we move towards the time of the year when natural gas often reaches a seasonal high.

The United States Natural Gas Fund (UNG) moves higher and lower with the price of NYMEX futures. The BOIL and KOLD ETN products are leveraged instruments that seek to return twice the percentage move in natural gas on the up and downside.

An early-week rally on Tropical Storm Delta heading for Louisiana

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As the Category Two Hurricane was preparing to make landfall in Texas and Louisiana on late Friday afternoon, the price of natural gas was sitting below the $2.60 per MMBtu level.

Source: CQG

The weekly chart displays a bullish formation in natural gas as the price posted gains over the past three weeks and has been making higher lows and higher highs since late June when it fell to the lowest level since 1995 at $1.432 per MMBtu. Natural gas settled at $2.741 level on October 9. Meanwhile, the weekly chart could be creating a bit of a bullish mirage for the natural gas market.

The move to a new high for 2020 at $2.821 last week was more a function of the roll from October to November futures than price action in the natural gas futures arena. The contracts rolled at an over 60 cents per MMBtu contango or premium for the November contract, creating the higher high. Even though Hurricane Delta was descending on Louisiana on Friday, the price of nearby natural gas closed the week below the medium-term technical resistance level at $2.905 per MMBtu.

Inventories remain near a record high

Last Thursday, the EIA told the natural gas market that the amount of natural gas in storage across the United States rose by 75 billion cubic feet for the week ending on October 2. Stockpiles were at 3.831 trillion cubic feet, 99 bcf above the peak in November 2019.

With only six weeks to go until the withdrawal season, natural gas inventories are heading above the four tcf level for the third time in history. At the current rate in injections, surpassing the previous record high at 4.047 tcf looks likely.

There is plenty of natural gas available in storage to meet any requirements over the coming months, regardless of where Mother Nature puts the average temperatures this coming winter. The high level of stockpiles remains a bearish factor for the price of the energy commodity.

Lower highs and lower lows but technicals and stocks take a back seat to storms that threaten the Henry Hub

The daily natural gas chart is not as constructive as the weekly pictorial.

Source: CQG

As the daily chart of November futures highlights, the price has made higher lows since late June, but the trend shifted to lower lows since early September. Technical support stands at the October 2 low of $2.373, the July 20 low of $2.253, and the June 25 bottom at $2.133 per MMBtu. The June bottom occurred when the nearby contract reached a low that was 70.1 cents lower at $1.432 per MMBtu.

Technical factors and inventories in the natural gas market do not mean much when a hurricane bears down on the region close to the delivery point for NYMEX futures at the Henry Hub in Erath, Louisiana. However, when the storm passes and if there is not all that much damage, the market is likely to turn its attention back to stockpiles heading for a record level in an economy where energy demand continues to struggle with the impact of the global pandemic.

The final quarter of the year tends to be the most volatile time of the year for natural gas, as it marks the start of the peak season for demand. The energy commodity often moves to highs towards the end of each year. However, 2020 is far from ordinary. The second wave of the coronavirus, stocks rising towards a record level, and the US election that will determine US energy policy and the regulatory environment over the coming years are likely to add lots of volatility to the natural gas futures market. Expect elevated price variance to continue in the natural gas market over the coming weeks.

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UNG shares were trading at $12.60 per share on Tuesday morning, down $0.16 (-1.25%). Year-to-date, UNG has declined -25.27%, versus a 10.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...