In an October 6 Barchart article, I wrote:
Natural gas futures are beginning to show signs of seasonal strength. Expect lots of volatility in the energy commodity over the coming weeks and months. After rising to over $10 per MMBtu in August 2022, and with the war in Ukraine continuing, the odds favor more upside room for natural gas.
Nearby November NYMEX natural gas futures were at the $3.276 per MMBtu level on October 6. On November 3, the December futures contract was higher at the $3.50 level. Over the coming weeks, U.S. inventories will peak for the season. Still, the level of the energy commodity in storage across the United States remains high. At the same time, the threat of European supply shortages is also a factor that will drive the price over the coming months.
U.S. Inventories continue to climb
U.S. natural gas in storage across the United States has been at high levels throughout 2023.
Source: EIA
The chart highlights at 3.779 trillion cubic feet for the week ending on October 27, 2023, natural gas inventories were 8.4% above the previous year’s level and 5.7% over the five-year average for late October. Moreover, the stockpiles peaked at 3.644 tcf in 2022 and 2021, 3.732 tcf in 2019, and 3.234 tcf in 2018. Natural gas stocks were already above those end-of-the-season levels on October 27. In 2020, stocks rose to 3.958 tcf. The bottom line is there will be lots of natural gas available to meet the U.S. peak season requirements during the 2023/2024 withdrawal season.
U.S. prices for December and January remain in slightly bearish trends
The prices for natural gas futures for delivery in December 2023 and January 2024 are in slightly bearish trends in early November.
The December futures chart shows the pattern of lower highs since mid-August 2023, when the price ran out of upside steam at just over $3.90 per MMBtu. December futures reached a $3.216 low on October 3 and the exact $3.216 bottom on October 23, creating a double bottom in the energy commodity futures. Double bottoms are often reversal patterns, and December futures rose to nearly $3.65 per MMBtu on October 27 before falling to the $3.50 level on November 3.
Meanwhile, the January U.S. natural gas futures contract reached over $4 in mid-August before falling to $3.477 in early October. The January futures contract is at a premium to the December futures, but they made a marginally lower low on October 23 at $3.461 per MMBtu. January futures were just below the $3.80 level on November 3.
U.K. and Dutch price action reflects supply concerns
After rising to record highs in early 2022 when Russia invaded Ukraine, U.K. and Dutch prices fell when temperatures during the 2022/2023 winter were above average, causing lower demand. After reaching lows in May and June 2023, prices have been trending higher as the winter approaches.
The U.K. natural gas futures chart shows a pattern of higher lows and higher highs since the May 2023 low.
The Dutch natural gas futures chart highlights the same marginally bullish price pattern since the June 2023 low.
European prices could drive U.S. prices
As the 2023/2024 winter approaches, Europe remains precarious, as a cold winter could cause severe shortages. As the war in Ukraine continues to rate, Russia is using natural gas and other essential commodity production and exports as economic tools against “unfriendly” countries supporting Ukraine. A cold winter could cause a return of price and supply concerns, lifting U.K. and Dutch prices.
The growing U.S. LNG market exports the energy commodity from U.S. ports to regions where prices are much higher. With natural gas traveling the world by ocean vessels, supply issues in Western Europe could put upward pressure on U.S. prices over the coming weeks and months. The potential for supply and price concerns and the uncertainty of the winter temperatures in the U.S. and Europe should keep a floor under prices for the rest of 2023.
UNG is the U.S. unleveraged natural gas ETF product
The most direct and liquid route for a natural gas risk position is via the futures and futures options on the CME’s NYMEX division. The futures are highly volatile, and margin requirements create significant leverage. The U.S. Natural Gas Fund (UNG) is an ETF product that moves higher and lower with U.S. natural gas prices. UNG trades on NYSE Arca and is available to market participants with stock market accounts.
At $7.29 per share on November 3, UNG had over $990 million in assets. UNG trades an average of over 16 million shares daily and charges a 1.11% management fee.
Nearby December natural gas futures rose 13.3% from $3.216 on October 23 to $3.643 per MMBtu on October 27.
Over the same period, UNG rose from $6.74 to $7.44 per share, or 10.4%, as the ETF tracked the December futures contract on the upside.
Natural gas trades around the clock, while UNG is only available when the U.S. stock market operates. Therefore, the ETF can miss highs or lows when the stock market is not open for business.
Expect lots of price variance in the volatile natural gas futures arena over the coming weeks. In early November, seasonality and the war in Ukraine support the energy commodity at the current price levels.
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.
