Natural Gas Flirts With A Breakdown

Natural Gas Flirts With A Breakdown
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Natural gas is not only a highly combustible commodity in its physical form, but its price can also explode and implode over time. In the middle of November 2018, the price of the energy commodity took off on the upside and reached the highest level since 2014 at $4.929 per MMBtu.

The winter is always the peak season for demand in the natural gas market. It is the time of the year when inventories decline as people all over the United States increased their consumption of the fuel for heating their homes. The withdrawal season in the natural gas market lasts from November through March. One of the primary reasons for the price explosion in the natural gas market was the low level of stockpiles in storage throughout the US going into the withdrawal season.

After reaching the peak before the official start of winter, the price of natural gas ran out of upside steam. In December the price fell below the $4 level, and in late December and January, the $3 level gave way on the downside. Most recently, the price of natural gas fell to a low at $2.5490 per MMBtu on February 7, and it has not managed to rally far above that low. On Wednesday, February 13, the price of nearby natural gas settled at $2.575 which was only 2.6 cents above the recent low last week.  

Source: CQG

The weekly chart highlights the sharp rallies and declines that the natural gas market experienced since November. Critical technical support for the energy commodity currently stands at the February 2018 low at $2.53 per MMBtu which was only 1.9 cents below the recent low. Below there, the March 2016 low is the current level of long-term support at $1.611 per MMBtu. In late 2018 natural gas rose to its highest price since 2014, and now it is threatening to decline to its lowest level since 2016.

The current technical picture in the natural gas market displays an oversold condition. The price momentum indicator and the relative strength measure have declined into oversold territory on the weekly chart. However, the market is moving from the peak season of demand to the offseason over the coming weeks which likely accounts for the price weakness. Weekly historical volatility at over 53 percent is a reason why speculators tend to flock to the natural gas market in the hope of capturing a significant price trend as they did from October through November on the upside and from November through this month on the downside. However, the extreme volatility appears to have chased many risk seekers from the market as the open interest measure dropped from almost 1.7 million contracts last October to 1.265 million as of February 12.

The price volatility in the natural gas market makes it a highly risky asset, but where there is risk, there is the opportunity for rewards. Time will tell if the price can hold support at $2.53 and the market will experience another rally before the end of the peak season in 2019. However, with the energy commodity trading so close to technical support at the 2018 low, it is currently peaking over the edge of a bearish cliff that could lead to a test of the 2016 bottom which was the lowest price of this century. For those seeking price action in markets, natural gas is ground zero when it comes to price variance. 

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