- The market expected a 12 bcf injection into inventories after last week’s withdrawal
- Warm weather returns to broad areas of the US
- Natural gas remains around the $3 level as the winter is on the horizon
After trading to a high of $3.396 on October 30, December natural gas futures declined to $2.821 per MMBtu. It appears that natural gas inventories peaked at 3.955 trillion cubic feet during the week ending on October 23. Stockpiles do not appear headed over the four tcf level, and the 4.047 tcf peak will remain an untouched record in 2020.
The future of US output could be in the hands of Georgia’s voters in January. A runoff election for two seats will determine the majority in the Senate. A pair of victories by the Democrats would replace Mitch McConnel with Chuck Schumer as the majority leader and would hand President-elect Biden clear sailing for his agenda. The election will determine the future of US energy policy. Natural gas output is already falling as the number of rigs in operation has dropped significantly on a year-on-year basis. According to Baker Hughes, at the end of last week, 71 rigs were extracting natural gas from the earth’s crust as of November 6, 59 below the level at the same time in 2019.
The nearby natural gas futures price is now sitting above the November 2019 peak at $2.905 after surpassing that level over the past weeks. The United States Natural Gas Fund (UNG) tracks the price of the futures that trade on the CME’s NYMEX division.
The market expected a 12 bcf injection into inventories after last week’s withdrawal
According to Estimize, a crowdsourcing website, the market’s consensus was for a 12 bcf injection into storage for the week ending on November 6. The injection season is winding down after last week’s withdrawal of 36 bcf. The latest inventory report came one day late as the Veterans Day holiday on November 11 delayed its release.
As the chart highlights, inventories rose by only eight billion cubic feet at the end of last week. The total amount of natural gas in storage across the US stood at 3.927rillion cubic feet, 5.3% above last year’s level, and 4.7% over the five-year average. It was the thirty-second consecutive week where the percentage over last year’s level declined.
The initial reaction in the futures market was bullish. After last week’s withdrawal, the small injection signaled that inventories peaked at 3.955 tcf in 2020 and will continue to decline over the coming weeks and months until March 2021.
The ten-minute chart of the December futures contract shows that natural gas traded down to $2.989 as the EIA released the latest data. The price was over $3.05 per MMBtu shortly after the weekly inventory report.
Warm weather returns to broad areas of the US
Hurricanes along the Gulf Coast of the US pushed the natural gas price higher in September and October. Erath, Louisiana is the delivery point for NYMEX natural gas futures, so the energy commodity tends to be highly sensitive to storms during the hurricane season.
The last push to the upside came as a cold snap in late October gripped vast areas of the United States, causing heating demand to rise.
The weather warmed up in early November. No storms and warmer conditions allowed natural gas to decline to below $3. On November 9, the price of December futures fell to a low of $2.821 per MMBtu but returned to over the $3 level this week after the EIA reported the latest storage data.
The chart illustrates that the total number of open long and short positions has been climbing over the past sessions, rising from 1.168 million contracts in late October to 1.233 million as of November 12. The metric is trending higher as the peak season of demand has arrived. Price momentum and relative strength indicators had dropped into oversold conditions but turned higher as the price of natural gas bounced by over twenty cents per MMBtu since Monday, November 9. Daily trading ranges have widened, pushing daily historical volatility to over 53%, not far off this year’s high.
Warm weather across the US pushed the price of natural gas lower at the beginning of this week, but with Thanksgiving around the corner, the cold air will make a return soon.
Natural gas remains around the $3 level as the winter is on the horizon
As we head into the winter months, natural gas prices typically move higher. Since 2014, the NYMEX futures price peaked for the year in November through February. Over the past two years, the high came in November. Nearby futures already rose above the November 2019 peak at $2.905 when it traded to just shy of $3.40 in October.
2020 is anything by an ordinary year in all markets, and natural gas is no exception. While weather conditions are likely to determine short-term moves, inventories are at a much higher level than over the past two years, with plenty of supplies to meet all demand over the winter months.
Moreover, the future of natural gas production in the US could depend on the runoff elections for Senate seats in Georgia on January 5. Politics and the weather are the most significant factors for the natural gas futures market as it heads into the 2020/2021 winter season at just over $3 per MMBtu.
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UNG shares were trading at $11.58 per share on Friday morning, up $0.36 (+3.21%). Year-to-date, UNG has declined -31.32%, versus a 12.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More…
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