Natural Gas: What can lift prices with inventories at the current level?

• Natural gas retreats to below $2.20 per MMBtu
• A triple-digit withdrawal, but a warm holiday across the US
• Only short covering can lift the price with inventories at the current level

The Christmas holiday on Wednesday caused a one-day delay in the release of the latest natural gas inventory data from the Energy Information Administration. The was not a white Christmas in the US on December 25 as the temperatures in Chicago reached almost 60 degrees. New York and Boston were above freezing, so the demand for heating in some of the most populated cold-weather locations was below average.

On Christmas Eve, the price of nearby January natural gas futures on the NYMEX settled at $2.172 per MMBtu. While the price of the energy commodity remained above the December 9 low at $2.158, the settlement price was the lowest yet.

The United States Natural Gas Fund (UNG) is the non-leveraged ETF product that tracks the price action in the NYMEX futures market.

Natural gas retreats to below $2.20 per MMBtu

On Friday, December 27, as the nearby January futures contract was rolling to February, natural gas fell to a marginally lower low at $2.156 per MMBtu.

(Source: CQG)

The daily chart shows the weak price action at the end of last week. Natural gas fell to a lower low after the release of the latest EIA data pushing price momentum and relative strength indicators into oversold territory. The total number of open long and short positions dropped from 1.3156 million contracts on December to 1.270 million on December 26 as the January futures rolled to February. The low in the now active month February contract was at $2.167, which was also a new low on December 27.

A triple-digit withdrawal, but a warm holiday across the US

I had expected an over 100 billion cubic feet decline in natural gas inventories as of December 20. Estimize, a crowdsourcing website, had projected that stockpiles would drop by around 118 bcf. Meanwhile, the withdrawal was more than expected.

(Source: EIA)

The EIA told the natural gas market that the amount in storage fell by 161 bcf. Total stocks stood at 3.250 trillion cubic feet, 19% above last year’s level, but 2.1% below the five-year average for this time of the year. Even though the withdrawal was above the level the market expected, the price moved lower in the aftermath of the data.  

(Source: CQG)

The ten-minute chart shows that natural gas spiked to a high of just over $2.24 on the February contract, and then fell to under $2.19 per MMBtu. The price action was a continuation of the bearish trend in the energy commodity.

Only short covering can lift the price with inventories at the current level

With stocks 19% above the level last year at this time, the only hope for a recovery rally could be a period of short covering, which does not seem likely. The weather forecasts for Chicago, New York, and Boston for the coming week are for temperatures at or above the freezing level, which limits the upside potential for the price of natural gas. In the February futures, the island reversal trading pattern stands at $2.781 to $2.786 from early November, which has faded in the market’s rearview mirror.

For the short-term, unless we see a sudden return of colder than average temperatures, the bearish trend is likely to continue.

The United States Natural Gas Fund L.P. (UNG) was trading at $17.32 per share on Friday afternoon, down $0.17 (-0.97%). Year-to-date, UNG has declined -25.73%, versus a 21.57% rise in the benchmark S&P 500 index during the same period.

UNG currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #51 of 109 ETFs in the Commodity ETFs category.