Natural Gas Rallies When It Should Dip and Vice Versa

Natural Gas Rallies When It Should Dip and Vice Versa
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Natural gas is often the most volatile commodity that trades in the futures market. While the energy commodity is combustible in its physical form, price explosions and implosions in the natural gas market are not out of the ordinary. Since 1990, the price of natural gas at the Henry Hub in Erath, Louisiana has ranged from $1.02 to $15.65 per MMBtu.

The price variance in the natural gas market acts as a magnet for those market participants looking for significant price action and wide moves on a percentage basis. We have just come through the withdrawal season for the natural gas market. The winter is the peak season for demand for the energy commodity each year, and from November until late March stockpiles of the energy commodity decline as heating demand peaks. The 2017/2018 withdrawal season began early and ended late. The first withdrawal from storage came during the first week of November while it typically occurs around the Thanksgiving holiday. This year, withdrawal continued until late April as late winter snows, and cold weather gripped the Northeast and Midwest of the United States. Over the prior two years, inventories entered the season of peak demand with more than four trillion cubic feet of the energy commodity in storage. This year they peaked at 3.79 trillion.

As of the week ending on June 1, total stockpiles stood at a level that was 30.5 percent below the prior year and 22 percent below the five-year average for mid-May. However, over recent weeks we have seen natural gas flow into storage at an accelerated rate.

The price action in the natural gas market did anything but reflect the storage data, in fact, it has run in a counter-intuitive fashion. 

Source: CQG

As the weekly chart highlights, the price hit a high of $3.661 in late January which was lower than the high from the previous year at $3.994 even though stockpiles were lower this year than last. At the same time, the prolonged season of withdrawals did nothing to support the price as it fell in early February and remained near the bottom until mid-April. However, the price has been making higher lows over the course of recent months. Now that the gas is flowing back into storage again in preparation for the 2018/2019 withdrawal season, the price has suddenly moved to the upside and is threatening to eclipse the $3 level, a price we have not seen since the dead of winter during the first week of February.

The price action in the natural gas market is an enigma wrapped in a riddle these days and fundamentals have not impacted the price to the extent that market participants might have guessed. The supply side of the fundamental equation for the energy commodity has expanded because of massive discoveries in the Marcellus and Utica shale regions of the U.S. At the same time; the demand side has also increased as natural gas power-generation replaced coal and demand for LNG for exportation around the world has caused usage to climb. Over past months, natural gas had dipped when it should have rallied, and now it is rallying when supplies are filling storage which should weigh on the price of the energy commodity. Natural gas continues to be a volatile commodity and trading the daily moves can offer market participants lots of opportunities for profits. 

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