The end of the injection season in the Natural Gas market is now less than one month away. Last year at this time, the price of the energy commodity was preparing to blast off to the upside on a move that took it within ten cents of $5 per MMBtu. The energy commodity rose to the highest price since 2014 last November. During the week of October 22, 2018, the price of natural gas traded in a range from $3.102 to $3.25 per MMBtu. As of Thursday, October 24, the nearby natural gas futures contract traded from $2.213 to $2.322 per MMBtu, almost $1 lower than last year at this time.
Each Thursday, the Energy Information Administration releases its weekly data on inventories held in storage around the United States. The stockpiles data always has the potential to move the price of the volatile energy commodity, particularly when the data is significantly higher or lower than the market expects. The United States Natural Gas Fund (NYSE:UNG) is the most liquid non-leveraged natural gas ETF product.
The market had expected an injection of 91 billion cubic feet
Coming into the data release for the week ending on October 18, the market’s consensus was for an injection of 91 bcf after last week’s 104 bcf increase in stockpiles.
As the chart shows, stocks rose by a lower than expected 87 bcf as of October 18. Inventories now stand at a total of 3.606 trillion cubic feet, which is 16.8% higher than last year at this time and 0.8% above the five-year average for this time of the year. In the previous report, inventories rose above the five-year average for the first time in 2019, which pushed the price of the energy commodity lower. On October 21, the price of nearby November NYMEX natural gas futures fell to a higher low at $2.213 per MMBtu.
The EIA report came in a touch lower, and the price edged higher
The lower than expected injection caused buying to emerge in the natural gas futures market following the release of the latest EIA data.
The ten-minute chart of November futures illustrates the post-data rally that took the price to a high at $2.342. As I write this piece, the price was at the $2.325 per MMBtu level, over 10 cents above the October 21 higher low.
Since early August, the November natural gas futures contract has made a series of higher lows, which is a bullish price pattern as we are heading into the season where demand peaks each year.
Only three weeks to go until stockpiles begin to decline
If history is a guide, there are now three weeks left in the injection season. Last year, the shift in seasons led to an explosive rally that took the price of natural gas futures to $4.929 per MMBtu, the highest price since 2014.
A similar move in not in the cards this year because total inventories are at the 3.606 tcf level compared to a peak at 3.247 tcf last year at the start of the time of the year where demand caused stockpiles to decline.
Meanwhile, the great unknown as we head into the winter season is now the demand for heating, which is a function of average temperatures across the United States. Uncertainty over the weather from November through March should provide support for the price of natural gas since it is at a low level given the time of the year.
January is the peak time of the year for natural gas demand in the futures market. The NYMEX January futures contract was trading at the $2.56 level on October 24 following the release of the latest EIA data. I believe that the market has at least one rally on the horizon that should take the price to the $3 per MMBtu level or high on January futures. Seasonality in the natural gas market makes the current price a compelling level for a long position from a risk-reward perspective.
The United States Natural Gas Fund L.P. (UNG) was trading at $19.43 per share on Thursday afternoon, up $0.20 (+1.04%). Year-to-date, UNG has declined -16.68%, versus a 12.84% 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.