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Andrew Hecht

How Low Can Natural Gas Fall?

In August 2022, nearby U.S. natural gas futures prices rose to the highest level since 2008, when they eclipsed $10 per MMBtu. Two years later, the continuous contract was threatening to fall below $2 per MMBtu. 

In a July 2 Barchart article, I concluded:

We could see lots of volatility in natural gas futures over the coming months. While inventories across the U.S. remain a bearish factor, the technical trend since the February low and the ongoing war in Europe are bullish factors. Natural gas is one of the most volatile commodities. Price variance should remain elevated in the current environment.  

The nearby futures were at the $2.495 per MMBtu level on July 1, and they have not remained elevated, falling to under $2 per MMBtu. However, prices for deferred delivery during the upcoming winter months remain above the $3 per MMBtu level as seasonality has caused a steep contango or forward premium for winter versus the nearby futures. 

The U.S. natural gas futures remain in a bearish trend

After trading at nearly $3.20 per MMBtu in mid-June as U.S. cooling demand soared because of unseasonably high temperatures, natural gas prices ran out of upside steam. 

The three-month chart highlights the steady decline throughout the second half of June and July that took natural gas to the $1.882 per MMBtu level on August 5. 

The longer-term ten-year chart shows the bearish trend since August 2022  when nearby U.S. NYMEX natural gas futures reached the highest price since 2008 at over $10 per MMBtu. 

Inventories are high

One of the issues facing U.S. natural gas prices is the high level of stockpiles

Source: EIA

The chart illustrates that natural gas inventories across the United States were at the 3.249 trillion cubic feet level on July 26, 8.4% above the previous year’s level and 15.7% over the five-year average for late July. 

Natural gas ended the 2023/2024 withdrawal season at 2.259 tcf, the highest level in years. A glut of natural gas has weighed on U.S. prices. 

The forward curve reflects concerns over winter prices

Natural gas is a seasonal energy commodity that tends to reach highs as the uncertainty of winter heating demand peaks during the coldest months. 

The natural gas forward curve shows the nearly $1.40 per MMBtu premium for U.S. natural gas for delivery in January 2025 compared to the nearby futures for September 2024 delivery. While nearby prices are flirting with the $2 level, in January 2025, prices are above $3.45 per MMBtu.  

Levels to watch in the nearby contracts

Nearby natural gas prices are under pressure with the winter months on the horizon. 

The three-year chart illustrates the continuous contract’s bearish trend, which is heading for a test of critical technical support at the February 2024 low near the $1.50 level. Technical resistance is at the mid-June high at near the $3.20 per MMBtu level. 

While the chart and seasonality favor an eventual upside correction as winter approaches, high inventory levels suggest prices could remain under pressure. Meanwhile, as we learned in the crude oil futures arena in 2020, the downside is not necessarily limited to zero, as crude oil fell far below zero into negative territory before recovering. Crude oil’s 2020 decline occurred as there was nowhere to store the energy commodity. With natural gas inventories at high levels, there is a slight potential for a lack of storage that could lead to negative prices.

UNG tracks nearby natural gas- BOIL and KOLD provide leverage

While the odds favor higher natural gas futures prices over the coming months, peaking in late fall or early winter, the storage issue could continue to be a bearish factor. 

Meanwhile, speculative shorts could fuel the next rally as the total number of open long and short positions in the NYMEX natural gas futures market remains at over 1.5 million contracts. We could see increased price variance over the coming months. High volatility creates trading opportunities. 

The NYMEX futures and futures options market is the most direct route for a risk position in natural gas. However, futures involve leverage as margin requirements mean traders can control a significant long or short risk position with a fraction of the contract value, creating leverage. 

The U.S. Natural Gas Fund (UNG) is an unleveraged ETF product that tracks nearby natural gas prices. At $13.73 per share, UNG had nearly $813.5 million in assets under management. UNG trades an average of around 6.38 million shares daily and charges a 1.11% management fee.

The Ultra Bloomberg Natural Gas 2X ETF (BOIL) and the Ultrashort Bloomberg Natural Gas -2X ETF (KOLD) provide up and downside leverage in nearby natural gas prices. At $9.71 per share, the bullish BOIL ETF had $620.875 million in assets under management. BOIL trades an average of nearly fourteen million shares daily and charges a 0.95% management fee. At $70.93 per share, the bearish KOLD ETF had almost $63.5 million in assets under management. KOLD trades an average of nearly 911,616 shares daily and charges the same 0.95% management fee. 

BOIL and KOLD are leveraged products that experience time decay, increasing trading risks. They are only appropriate for short-term bullish or bearish risk positions. BOIL and KOLD’s leverage can lead to periodic reverse stock splits that erode value. 

With natural gas heading toward the peak season of uncertainty with prices flirting with the $2 level, the odds favor a price recovery. However, the high inventory level could prevent significant rallies as the market heads into the peak 2024/2025 heating season. Trading natural gas requires a plan and discipline. Price and time stops are the best approach to the energy commodity. Meanwhile, as the oil market taught us in April 2020, the downside potential on nearby futures is not limited to zero. 

On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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