On November 3, nearby December NYMEX natural gas futures prices were at $3.505 per MMBtu, with the futures for January delivery higher at the $3.80 per MMBtu level. In a Barchart article on that day, I wrote:
Expect lots of price variance in the volatile natural gas futures arena over the coming weeks. In early November, seasonality and the war in Ukraine support the energy commodity at the current price levels.
At around $1.20 per MMBtu lower on December 6, natural gas is over 31.5% lower at the start of the peak demand season, which could be a warning or a golden opportunity. U.S. natural gas for January delivery was at the $2.61 per MMBtu level on December 6.
Plenty of natural gas in storage weighs on prices
One of the leading fundamental indicators for the U.S. natural gas futures market is the amount in storage across the United States.
As the chart highlights, there were 3.836 trillion cubic feet of natural gas in storage as of November 24. Stockpiles were 9.8% above the late November 2022 level and 8.6% over the five-year average. While stocks dropped by 7 billion cubic feet for the week ending on November 17, the increase the following week pushed the inventories to a higher high for the 2023 injection season, delaying the start of the 2023/2024 withdrawal season.
At 3.836 tcf, inventories are higher than in 2018, 2019, 2021, and 2022. In 2020, stocks peaked at 3.958 tcf. The latest forecast for the stockpile data for the week ending on December 1 is for a 73 bcf withdrawal, which would begin the peak demand season at the highest level since 2020. The bottom line is that there is plenty of natural gas in storage to meet the coming winter’s U.S. requirements. Prices have dropped as supply concerns evaporated.
U.K. and Dutch futures going into the winter
A significant factor that pushed natural gas prices to fourteen-year highs in August 2022 at over $10 per MMBtu was the supply and price concerns in Western Europe. While U.S. prices rose to the highest level since 2008, U.K. and Dutch prices soared to record highs.
The U.K. ICE natural gas futures chart shows the explosive 2022 rally. The price imploded after a lower high in August 2022 fell as a warmer-than-anticipated winter reduced the demand. However, after reaching a low in May 2023, U.K. natural gas futures have made higher lows and were sitting near the 110 level on December 6, the highest pre-peak season level before 2022 since 2005.
The Dutch ICE natural gas futures chart shows a similar pattern, with an explosion to highs in March 2022 and an implosion to lows in late 2022 and 2023.
The U.K. and the Netherlands have a long history relying on Russian natural gas imports. Russia has used natural gas and other commodities as economic weapons against “unfriendly” countries supporting Ukraine since its February 2022 invasion. The temperate 2022/2023 winter caused the demand to fall eliminating supply concerns. However, last winter’s temperatures do not guarantee that the 2023/2024 winter will be as warm.
Since U.S. liquid natural gas increasingly travels the world by ocean vessels, U.S. prices have become more sensitive to higher European and Asian prices. Therefore, a cold winter that creates European shortages can potentially lift U.S. natural gas prices over the coming weeks and months.
The natural gas trend tells us speculators are short
January is often the month when U.S. natural gas demand and prices peak. Therefore, the energy commodity’s January contract is often the most expensive.
The chart of the U.S. ICE natural gas futures curve shows the prices of deferred contracts peaking in January 2024, 2025, and 2026. Natural gas for delivery is at the highest level for the year out to 2032.
Natural gas is a highly volatile energy commodity, attracting lots of speculative activity. The price action in 2032 indicates that trend-following traders and speculators have been short the January futures.
The one-year chart of January futures shows the peak in December 2022 at $6.215 per MMBtu. The pattern of lower highs and lower lows has encouraged speculative short-selling and riding the bearish trend over the past year. The total number of open long and short positions in the January contract has increased for two reasons. As January became the active month, speculators flocked to the contract as the nearby futures month experiences the most price variance. Moreover, the bearish trend has increased the open interest metric.
Meanwhile, total open interest across all natural gas futures contracts increased nearly 32% from 1.016 million contracts at the end of December 2022 to 1.339 million contracts in early December 2023. Rising open interest and falling prices technically validate a bearish trend in futures markets.
Risk-reward favors a rally
While natural gas futures prices remain in a bearish trend, supported by fundamental inventory data and technical open interest factors, the price is at a level that could trigger short covering, igniting a rally at the $2.60 per MMBtu level at the start of the 2023/2024 winter season.
The monthly chart shows the last time nearby natural gas futures were near the $2.60 per MMBtu level in December, which was the lowest level during the final month of the year since 2020. In 2022, 2021, and 2016 through 2018, prices exceeded the $3 level.
Over the past ten years, the nearby U.S. futures price has been as low as $1.44 and as high as $10.028 per MMBtu. At $2.80, the historical risk-reward dynamics favor the upside, as at least one more seasonal rally could occur as uncertainty over the temperatures and the demand remain elevated in December 2023.
UNG is the unleveraged natural gas ETF product
The most direct route for a risk position in the U.S. natural gas market is the futures and futures options trading on the CME’s NYMEX division. Natural gas prices are volatile, and the margin requirements only compound the risk when trading futures.
Meanwhile, the U.S. Natural Gas Fund (UNG) tracks short-term price action in the nearby natural gas futures market. At $5.08 per share on December 6, UNG had over $1 billion in assets under management. The liquid ETF trades an average of over 19.7 million shares daily and charges a 1.11% management fee.
The last rally in the January ICE futures took the price 11.7% higher from $3.461 on October 23 to $3.865 per MMBtu on October 31.
Over the same period, UNG rallied 12% from $6.74 to $7.55 per share.
UNG may not have leverage, but the natural gas forward curve makes it a highly volatile ETF. Therefore, using time and price stops when trading or investing in the energy commodity with the UNG ETF is wise.
The chart shows that UNG has experienced three reverse splits since 2011. At $5.45 per share on December 6, another reverse split could be on the horizon.
Reverse stock splits destroy value over time.
The long-term UNG chart shows the destructive role reserve splits. Therefore, time is critical for UNG, and time stops, and price stops are an integral part of risk-reward dynamics.
U.S. natural gas prices are low going into the peak winter months. U.S. inventories, a bearish trend, and stable European prices continue to weigh on the energy commodity. However, a significant level of trend-following shorts and the uncertainty of the weather and demand over the coming months could trigger a sudden rally in the market that can experience wide price variance in the blink of an eye.
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.
