Natural gas is a seasonal commodity that tends to reach highs during winter and lows during spring. The injection season, when inventories rise, runs from late March or early April through November. In November, increasing heating demand causes stockpiles to decline. Withdrawals from stockpiles run through March.
Since August 2022, the continuous contract NYMEX natural gas futures prices have traded from the highest level since 2008 at $10.028 to a $1.481 per MMBtu low. As the market prepares for the 2024/2025 winter and withdrawal season in November, natural gas futures are closer to the lows at under $3 per MMBtu.
A short-term bearish trend
After trading at a $3.406 per MMBtu high on October 4, December natural gas futures on the Intercontinental Exchange ran out of upside steam.
The daily chart highlights that natural gas futures have made lower highs and lower lows, remaining below the $2.70 per MMBtu level in November.
Medium-term consolidation with a bullish bias
While the short-term trend remains bearish, natural gas prices’ medium-term path of least resistance is in a consolidation pattern with a bullish bias.
The weekly chart of continuous natural gas futures prices highlights the consolidation, with natural gas prices making higher lows and higher highs since the mid-February 2024 $1.60 per MMBtu low.
Stocks are high going into winter
The latest U.S. natural gas inventory data indicates there are plenty of supplies going into the peak heating demand season during winter.
As of the week ending on November 1, 2024, 3.932 trillion cubic feet of natural gas were in stockpiles across the United States. Stocks were 4.2% above the previous year, and 5.8% over the five-year average for the beginning of November.
Meanwhile, stockpiles exceed the 2023 3.836 tcf end of the injection season level and are heading for a challenge of the 2020 3.958 tcf high. The bottom line is that inventory levels remain a bearish factor for the natural gas futures market going into the 2024/2025 withdrawal season, when stocks decline as heating demand increases.
European prices matter- LNG expands natural gas’s addressable market
U.S. natural gas’s addressable market has grown over the past years as technological advances in processing U.S. natural gas into LNG make it possible to export the energy commodity beyond the North American pipeline network. Natural gas from the U.S. now travels by ocean vessels to international destinations in liquid form.
While U.S. natural gas prices were once determined by only North American fundamental dynamics, prices abroad now impact the price path of the energy commodity.
The weekly chart of U.K. natural gas prices highlights the consolidation pattern with a bullish bias.
Dutch natural gas prices display the same slightly bullish trend.
The chart shows that the U.S. and Russia are the world’s leading natural gas-producing countries. Western European countries have depended on Russian natural gas flows. The ongoing war in Ukraine could continue to impede the flow from Russia to “unfriendly” NATO countries supporting Ukraine. A cold European winter could cause the demand for U.S. LNG to increase, putting upward pressure on U.S. natural gas futures prices.
Temperate European weather conditions over the past two winters have not caused the natural gas demand to impact U.S. prices. However, the weather during the 022/2023 and 2023/2024 winter seasons does not guarantee the same warmer temperatures for the 2024/2025 season.
As U.S. natural gas is more sensitive to European and foreign demand dynamics, the broader addressable market could impact prices over the coming months. Meanwhile, a colder than average U.S. winter could put further upward pressure on ICE natural gas futures.
BOIL and KOLD are leveraged ETF products that are only appropriate for short-term risk positions
The most direct route for a risk position in U.S. natural gas is the futures and futures options offered by the CME’s NYMEX division. The UNG ETF tracks nearby U.S. natural gas prices. At the $13.63 per share level, UNG had nearly $825 million in assets under management. UNG trades an average of over 7.8 million shares daily and charges a 1.11% management fee. The volatility in natural gas futures makes UNG appropriate for short or medium-term risk positions. From a long-term perspective, UNG has challenges as the volatility of the month-to-month spreads in the natural gas futures arena tends to erode its value even though it is not a leveraged ETF product.
The BOIL and KOLD ETF products provide double leverage on the up and downside compared to the UNG ETF and the nearby natural gas futures prices.
At $40.94 per share, BOIL had over $555 million in assets under management. The double-leveraged bullish natural gas ETF product trades an average of nearly 2.87 million shares daily and charges a 0.95% management fee.
At $71.50 per share, KOLD had over $105.925 million in assets under management. The double-leveraged bearish natural gas ETF product trades an average of over 1.37 million shares daily and charges the same 0.95% management fee.
BOIL and KOLD are valuable short-term trading tools, but their leverage caused the ETFs to suffer from time decay when the natural gas futures remain stable or move contrary to expectations. BOIL and KOLD can experience value-eroding reverse splits. Therefore, price and time stops are optimal when approaching the natural gas market with the leveraged ETFs.
Natural gas prices are in a bearish short-term trend going into the 2024/2025 peak demand season, but the medium-term trend suggests that higher lows and higher highs could lead to substantial price appreciation if temperatures drop and LNG demand increases.
Natural gas offers value below $3 in November 2024. The energy commodity has traded between $1.60 and around $10 per MMBtu since August 2022. With the energy commodity closer to the low, the odds favor a recovery rally as the market moves into the peak demand and inventory withdrawal season for 2024/2025.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
