Summary
- A besieged commodity.
- Inventories grow.
- A surprise rally on injection day.
- Sellers continue to expect lower prices.
- Expect the unexpected in this volatile commodity.
Price action in natural gas never ceases to amaze me. Just when all the stars line up and you expect prices to fall, they do exactly the opposite. That is why it is such a volatile commodity. Experienced traders know that the natural gas futures market takes no prisoners. Volatility is a trader's paradise, and that is why this energy market that historically moves like no other is such a paradox to me. Action last week was no exception - another paradox wrapped up inside an enigma.
A besieged commodity
Since trading at highs of $6.493 in February 2014, natural gas has been under siege. The price of the commodity closed on Friday, April 17 at $2.634 per mmbtu - almost 60% below the highs over a year ago. It was a winter of discontent for anyone crazy enough to believe that natural gas could stage a rebound, and a winter of profits for those who sold every rally.
Meanwhile, on last Monday, April 13, natural gas put in yet another new low at $2.475, but then, as it often does in this volatile market, it did the unexpected.
Inventories grow
After making lows on Monday, the price rebounded throughout the week, most likely on short covering. The U.S. Energy Information Administration released weekly inventory numbers on Thursday, and reported an injection of 63 billion cubic feet for the week ending April 10. Injection season is now underway. Inventories stand at a healthy 1.539 trillion cubic feet, which is 81.7% above last year's level, but still 8.6% below the five-year average for this time of year. When I saw the number, I said to myself, "Here we go again" - I expected all those shorts who took profits during the week to sell once again. However, that is not exactly what happened last Thursday.
A surprise rally on injection day
It is easy to remember after the fact to expect the unexpected in natural gas, but it is very difficult to do so in the heat of trading action, particularly on days when the EIA releases inventory data. When the number came out, the price began to rally, and it ran all the way up to highs of $2.69 per mmbtu, 21 1/2 cents (or 8.7%) above Monday's lows. Volume was huge, at over 460,000 contracts traded, the most active day since late February. I sat there scratching my bald head wondering why this was happening. What was I missing? Perhaps the correction in crude oil prices was having an effect. Natural gas could just be catching a contagious bid from the rest of the energy sector. Perhaps the market was short and some aggressive energy traders made the shorts pay. On the other hand, perhaps volatile natural gas futures is a market that enjoys handing out pain to the largest number of market participants possible. Paranoia set in as I covered my short position, once again chopped to pieces looking to catch a trend that never developed. On Friday, rational heads prevailed as prices edged lower in low volume trading, and the price finished the week at $2.634 per mmbtu.
Sellers continue to expect lower prices
Analysts and many traders continue to expect lower prices in natural gas. Now that spring has arrived, injections into inventory will be coming fast and furious. Never mind that rig counts are falling; the cheap natural gas available from areas like the Marcellus and Utica shale is bound to cap prices. The daily chart continues to look like an intermediate ski slope.
(click to enlarge)
It is clearly not a positive picture for the price of natural gas, based on the daily chart. Longer-term charts do not look so special either. Right now, technical factors are not giving any clues, with the relative strength indicator and momentum indicator, the slow stochastic, in neutral territory. The only thing that sticks out on the daily chart is the level of open interest, the total number of long and short positions that remain open. At over 1.02 million contracts, open interest is up at the highest level of the year. Given my theory that natural gas seeks to punish the largest number of market participants at any one time, perhaps that is as good a reason as any for the tepid rally that began last week to continue.
Expect the unexpected in this volatile commodity
I like to write about natural gas - I find it far more soothing than trading the crazy commodity. In a way, I find vomiting words about the commodity on paper therapeutic. Fact is, over the years, I have made significant profits in the energy commodity, but certainly not lately. However, to give up trading natural gas now would be a defeat, and I am not a quitter.
What will move the price of this commodity in the weeks and months ahead is a mystery. Perhaps a hot summer with lots of hurricanes is just before us. Perhaps, as my friend from Texas recently opined, a series of earthquakes will throw a monkey wrench into the fracking mania going on across regions of the gas-rich United States. On the other hand, perhaps natural gas will decide to move in one direction or another for no good reason at all. That is the beauty of the natural gas market - to expect the unexpected.
The other day, I thought about a new trading strategy: fading my own view. There was an episode of Seinfeld years ago where George Costanza decided to become opposite George. Whatever his mind or emotions told him, he just did the opposite. It turned out pretty well for George. Maybe this week, I will try that method and report back on the results. In the meantime, I look forward to hearing from all of you, because I learn so much from all your comments. Perhaps you can provide this frustrated trader with some much-needed market-based therapy. Thanks in advance!
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