Is Natural Gas At Inflection Point?
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After failing just shy of the $4.90 level for the third time in 2014 most recently in mid-June, Natural Gas
prices have depreciated nearly 20%. Front month natural gas prices are
currently trading below the $4 psychological level for the first time
since mid-January. On a daily chart you can notice that a gap was filled
in the chart this week and in my opinion we are very close to an
inflection point. While past performance is not indicative of future
results the last time we traded around current levels buyers emerged and
within 6 weeks prices had screamed 25% higher. The fundamentals are far
different this time as we continue to see below normal temperatures
contributing to above average injections in our weekly storage numbers
(see below).
Working Gas
The recent large buildup in supplies
has been the main contributing factor on natural gas price action. A
trend of 13 weekly injections above the 5-year average has kept the
bears in the driver’s seat. The polar vortex-like conditions that
drained supplies during winter has had the opposite effect of late with
cooler temperatures tempering air conditioning demand for natural gas.
If and when temperatures rise which is in the cards in the coming weeks I
would expect natural gas to find its footing. Under normal
circumstances natural gas stockpiles tend to rise in the spring after
heating demand fades and hot weather kicks in but the addition usually
slows down by mid July and this year that has not been the case. Recent
injection levels have been extreme but my point is that this should not
continue unabated with warmer weather in the near future. It is such a
change just from this past winter when storage levels were near 11-year
lows.
Looking at a weekly chart we are
approaching the trend line that has acted as support for the last two
years. A decision will be made in the next couple sessions to see if
this level holds or we trade down to the 61.8% Fibonacci level that on a
front month continuation chart comes in 30 cents lower. I have lightly
started to tip-toe into bullish trade for aggressive traders. My
suggestion is to gain long exposure in November futures and at the same
time sell out of the money calls 1:1. Those traders that may want to
protect against further immediate downside could also purchase out of
the money puts until an interim low is established is August or
September contracts. In previous sessions I had a few clients in August
puts but we have let go of those trades at a profit on this week’s
descent. On the entire trade we have a realize profit in the August puts
and unrealized loss in our November futures, and an unrealized profit
in the November calls.
Weekly Natural Gas
Source: www.computervoicesystems.com
Looking at the seasonality in natural
gas it would appear that we are following a similar pattern in 2014.
Whether we bottom in the coming weeks and start trending higher as we
have in the last 15 years remains to be seen. Past performance is not
indicative of future results. Assuming we follow a similar pattern we
should find a low around $4 and then trade higher into the Fall where I
would expect prices to be 40-60 cents higher.
Natural Gas Seasonality
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