- The market expected a larger injection
- December futures sitting at over $3.25 per MMBtu
- Seasonality points to a peak in natural gas over the coming weeks
Natural gas futures on NYMEX rolled from November to December this week, but not before the price of the expiring contract moved above the $3 per MMBtu level and to a new high for 2020. The spread between the November and December contracts settled at just under a 23 cents per MMBtu contango on October 26. The December contract commanded a significant premium as natural gas enters the peak season for demand. In late September, the December contract reached a high of $3.37 per MMBtu.
Cold weather conditions across the US have provided support for the price of natural gas futures. Natural gas for delivery in January 2021 was trading at around $3.40 per MMBtu as the November contract expired, a twelve cents premium to December futures. The energy commodity is moving into the winter months at the highest price since January 2019. Each tick above $3.31 is a new high for 2020 on the continuous futures contract as of October 29. Meanwhile, stockpiles of natural gas are approaching the four trillion cubic feet level for the third time in history, and a new record peak above 4.047 looks like a possibility before the start of the 2020/2021 withdrawal season.
The United States Natural Gas Fund (UNG) follows the price of NYMEX futures higher and lower.
The market expected a larger injection
According to Estimize, the crowdsourcing website, the market had expected an injection of 40-50 billion cubic feet of natural gas into storage for the week ending on October 23.
As the chart highlights, the Energy Information Administration reported an increase of 29 bcf for the period, sending total stockpiles to 3.955 trillion cubic feet. Inventories are 7.9% over the five-year average and 7.8% over last year’s level. The latest data was the thirtieth consecutive week where the percentage above last year’s stock levels declined.
Meanwhile, with three weeks to go until inventories begin to decline during the withdrawal season that lasts until March, an average injection above 15 bcf would push the stocks above the four tcf level for only the third time in history. A new record high above 4.047 tcf requires an average rise of 30.7 bcf in the next three reports.
The market may have expected a larger injection, but stocks are set to reach close to or a new record high over the coming weeks, which is not bullish for the price of the energy commodity. At the four tcf level, there is plenty of natural gas to meet all requirements over the coming months.
December futures sitting at over $3.25 per MMBtu
Meanwhile, the natural gas price has been moving steadily higher since late June when it reached a twenty-five-year low of $1.432.
The chart highlights the rally in the natural gas futures market over the past four months. A series of storms that hit states along the Gulf of Mexico pushed prices higher. The Henry Hub in Erath, Louisiana, is the delivery point for NYMEX natural gas futures. Meanwhile, early cold weather conditions across the United States increased the demand for the energy commodity. The latest move higher on the continuous contract came as November futures rolled to December at a wide contango of around 23 cents per MMBtu.
The total number of open long and short positions in the natural gas futures market stood at 1.168 million contracts as of October 28, the lowest level since late September. Falling open interest as the price rises is not a technical validation of a bullish trend in a futures market. Price momentum and relative strength indicators were close to overbought conditions on Thursday. In the aftermath of the latest inventory data, the natural gas price was hovering around the $3.30 level. Natural gas was trading at the highest level since January 2019.
Seasonality points to a peak in natural gas over the coming weeks
In November 2019, natural gas peaked at $2.905 per MMBtu. In November 2018, the high was at $4.929, the highest level since February 2014. With inventories approaching the four trillion cubic feet level, we are likely to see a peak in the energy commodity over the coming weeks as the uncertainty of the average temperatures over the winter months reaches a high.
Natural gas is one of the most volatile commodities that trade on the futures market. Seasonality typically pushes the price to highs at the start of the winter season each year. In late October 2020, the price has already risen to the highest level in almost two years. Inventory levels are likely to provide a ceiling to the upside. However, the uncertainty of the November 3 US election that will determine the future of US energy policy and natural gas output over the coming years is the most significant macro event for the energy commodity.
The trend is always your best friend in markets, and in natural gas, it remains higher with the price at the $3.30 level following the latest EIA data. Inventory levels and seasonality tell us that the energy commodity should reach a peak over the coming weeks. Meanwhile, the election could change that if the result leads to a substantial decline in fracking and extracting natural gas and oil from the earth’s crust in the United States.
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UNG shares were trading at $12.48 per share on Thursday afternoon, up $0.02 (+0.16%). Year-to-date, UNG has declined -25.98%, versus a 3.85% 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...
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