The Natural Gas Futures market began dropping long before the global pandemic caused a deflationary spiral in stocks, commodities, and markets across all asset classes. After rising to a pre-peak season high of $2.905 per MMBtu, the natural gas futures market has done little but make lower highs and lower lows. On every attempt at a recovery, selling emerged.
Throughout the peak winter season, inventories remained above last year’s level and the five-year average, according to the Energy Information Administration. At the same time, the weather conditions during the winter season were not supportive of the price. It took until the week of March 27 for stockpiles to finally decline below the 2-trillion-cubic-feet level. In 2019, at the end of the withdrawal season, stocks dropped to 1.107 trillion cubic feet in March.
Last week, natural gas futures did not reach another new low, but it came within two ticks of the lowest price since 1995. As April futures had rolled to May, the price action gobbled up all of the contango as the new active month did reach a contract low. The United States Natural Gas Fund, LP (NYSE:UNG) moves higher and lower with the price of the forlorn energy commodity.
A perfect bearish storm going into the injection season
Natural gas prices continued along a slippery bearish path last week after April futures rolled to May.
(Source: CQG)
The daily chart of May futures on NYMEX highlights the decline to a new contract low of $1.521 per MMBtu on April 2. The price bounced from the low and settled at $1.621 on April 3 and was slightly higher in the aftermarket. It was not the first time in 2020 that natural gas made a new low. Most new bottoms over the past months led to a recovery. However, selling reappeared at lower and lower levels since November. Price momentum was in oversold territory at the end of last week, but it was attempting to cross higher. Relative strength was approaching a neutral reading, and daily historical volatility remained elevated at over 56%. Open interest, the total number of open long and short positions was drifting a bit higher over recent sessions.
The Typical Time For Seasonal Lows, But 2020 Is Anything But An Ordinary Year
The beginning of spring is typically a time when the price of natural gas reaches a low. In past years, the low came in February and March. The last significant bottom before 2020 was in March 2016 at $1.611 per MMBtu. This year, natural gas blew through that level.
If 2020 were an ordinary year, risk-reward would favor price stability and a recovery in the natural gas futures arena. There is nothing typical about the current situation facing the United States and the world.
Coronavirus continues to take its toll on lives and the economy. With around 90% of the U.S. at home practising social distancing and non-essential businesses shut down until at least April 30, and perhaps longer, the demand for energy has fallen off the side of a cliff. The current environment could continue to push the price of natural gas lower, but the recent events in the crude oil market could provide a clue that support for the natural gas market is on the horizon.
Forget Production Cost In This Environment
Energy production in the United States is a matter of national security. Debt-laden oil and gas producers are sitting on the edge of bankruptcy. The government is likely to swoop in and save the industry in the interest of energy independence. Stockpiles of natural gas are almost 77% above last year’s level and 17.2% above the five-year average for this time of the year, which is bearish for the price of the energy commodity. However, the comprehensive stimulus package and other fiscal measures may cover energy production to save jobs and ensure future supplies. The production cost of natural gas is a secondary factor in the current environment.
From a short-term perspective, the U.S. government is doing everything in its power to stabilize the economy. Until there is a treatment or vaccine for Coronavirus that allows for a return to regular business activity, natural gas is another U.S. business that stands to receive aid regardless of how far the price drops in the short-term. On Friday, April 3, the difference in the settlement prices for natural gas for delivery in May 2020 and January 2021 stood at $1.175 per MMBtu, 72.5% above the nearby price. The natural gas market is telling us that better days are ahead, but the short-term picture remains more than cloudy. On the long-term chart, below the $1.50 level, technical support stands at the 1995 lows of $1.335, and $1.25 per MMBtu.