The Winter season is approaching fast here in the United States (US). The usual predictions, estimates, and wild guesses are already suggesting ideas of how severe this Winter will be by spreading their stories across social media. One thing is always constant in the US during Winter: It will be colder than in prior months, leading to demand for products to keep us warm. Keep it simple, folks. We can all agree that Mother Nature is as unpredictable as the markets.
Our focus in this article will be a pattern in the natural gas market that may contradict market folklore.
After natural gas is extracted from the ground, it undergoes a process of processing, transportation, and storage before reaching end consumers. Natural gas storage is a crucial aspect of the overall supply chain. Producers use several methods to store natural gas:
- Depleted Gas Reservoirs: One approach is to store natural gas in depleted oil or gas reservoirs. Once a reservoir has been depleted of its primary hydrocarbons, it can be repurposed for natural gas storage. The natural gas is then injected into this underground storage.
- Aquifers: Some producers use underground aquifers for gas storage. Aquifers are natural underground water storage areas that can be repurposed for natural gas storage. Natural gas is injected into the aquifer during low demand and withdrawn during peak demand.
- Salt Caverns: Producers also use salt caverns for natural gas storage. These caverns are created by injecting water into salt formations, dissolving the salt, and creating a cavern. Natural gas can then be injected and stored in these caverns.
- Above-Ground Storage: Natural gas can be stored in above-ground facilities such as pressure vessels and gas holders. These are typically used for short-term storage and are more common in distribution systems close to end-users.
The choice of storage method depends on various factors, including geographical and geological conditions, economic considerations, and the specific requirements of the natural gas distribution system. Underground storage is often preferred because it allows large quantities of gas to be stored in a relatively small space and is generally considered safer and more environmentally friendly.
Injecting Versus Withdrawal Months
The terms "injection months" and "withdrawal months" are commonly used in natural gas storage. Natural gas is often stored in underground facilities to balance supply and demand, primarily during periods of low demand or to ensure a stable supply in unexpected demand spikes.
Injection Months: Injection months are when natural gas is injected or stored in storage facilities. This typically occurs during times of lower demand, such as the Spring and Fall when the demand for natural gas is lower than during the Winter months.
Withdrawal Months: Withdrawal months, late Fall to early Spring, is when stored natural gas is withdrawn from storage facilities to meet increased demand, especially during the Winter when heating demand is high.
Storage facilities play a crucial role in ensuring a reliable and continuous supply of natural gas to consumers, regardless of fluctuations in demand.
But Why is December a Bearish Period for Natural Gas?
December marks the beginning of Winter in the US. And as previously mentioned, it creates the need for heating products. Weather patterns are known to shift yearly and could result in a warmer or colder-than-expected Winter. Later in the Winter, these catalysts will have more impact on natural gas prices than in December.
What is often overlooked in December is the current supply and storage levels of natural gas accumulated during the injecting months. The US Energy Information Administration (EIA) reported on November 15, 2023:
"Working natural gas, stocks end refill season above the five-year average
Working natural gas in storage in the US Lower 48 states as of October 31 totaled 3,776 billion cubic feet (Bcf). This total represents the second-highest end-of-refill-season inventory during the past five years. Total inventory as of October 31 was 5% (178 Bcf) more than the five-year (2018–22) end-of-October average and 6.8% (239 Bcf) more than last year at this time."
Why is this report from the EIA significant for the natural gas prices in December?
Supply and demand is the answer. As mentioned previously, the latter part of Winter could cause a draw on the remaining supply of stored natural gas, and depending on the current season drawdown, prices may surge if the market feels there is inadequate supply to meet upcoming demand.
The difference between late Winter and December natural gas prices is the supply available at the beginning of the withdrawal season. As the new heating season begins, distributors sell aggressively into the retail market. This creates a very competitive environment for distributors, and to overcome the competition, there needs to be a price war to lower prices and absorb the higher supply of natural gas in December.
Refining the Seasonal Opportunity
Natural gas is highly volatile and recommended for experienced traders only. There are exchange-traded funds (ETFs) for natural gas, but as traders know, if the underlying futures contract is volatile, related products are as risky. Due to the shorter trading hours of ETFs compared to the 23-hour futures market, natural gas ETFs are prone to significant gap openings.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must also consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
Source: Moore Research Center, Inc. (MRCI)
Observing the daily February natural gas chart, the market traded sideways for a considerable period. Recently, the market has been trending lower as it approaches the MRCI optimal window for selling the natural gas market. The relative strength indicator (RSI) has encroached on the oversold territory during this period, indicating the market may need to rally to relieve some of this oversold condition before resuming the downtrend.
MRCI has identified a seasonal pattern (yellow box) of lower prices where the market closed lower on approximately December 20 than about November 27 during 13 of the past 15 years (blue line)—four of those years never had a daily closing drawdown.
In closing
It's important to note that factors discussed in this article can interact in complex ways, and multiple factors may contribute to price movements. Additionally, unforeseen events or developments not covered here could influence natural gas prices.
Natural gas products have been described as widow makers by market participants. The excessive volatility that can emerge quickly in this market has wiped out many professional and novice traders in the past and will probably continue to do so. Proceed with extreme caution when trading this market.
On the date of publication, Don Dawson 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.
