Natural Gas At The End Of The Withdrawal Season

Natural Gas At The End Of The Withdrawal Season

It is tempting to become bearish on natural gas as the injection season approaches, but there are reasons why buying on price weakness could yield profitable opportunities

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The beginning of the 2018/2019 peak season for natural gas demand was a time when price volatility increased dramatically. The price spiked to its highest level since 2014 and rose to $4.929 per MMBtu in mid-November last year as stocks began to decline. After making higher lows since February 2018 when the price found a bottom at $2.53 per MMBtu, natural gas broke out to the upside in late September and October.  As the period of peak demand approached, inventories in storage across the US were at their lowest level in years which triggered the explosive price action that took natural gas above the 2018 peak at $3.661 and late 2016 high at $3.994. Natural gas had not traded above $4 per MMBtu since 2014, and the price of the energy commodity fell just shy of $5 last November before the price came back down to earth.

After the substantial rally, natural gas fell to a low at $2.543 per MMBtu in mid-February of this year. If that low stands for the rest of 2019, it will mark the fourth consecutive year of higher lows. In 2016, the bottom was at $1.611. The following year, the low was $2.522, and in 2018 it hit bottom at $2.53. All of those lows came in February or early March as did the most recent higher bottom in mid-February.

 

Last week, the Energy Information Administration reported that natural gas inventories declined by 47 billion cubic feet (bcf) for the week ending on March 15. The decline was the smallest since the final week of December when the amount of gas in storage fell by only 20 bcf and was a sign that the withdrawal season is coming to an end and natural gas will begin to flow back into storage around the US over the coming weeks and months in preparation for the 2019/2020 winter season. 

Source: EIA

As the chart shows, the total amount of natural gas in inventories around the United States as of March 15 stood at 1.143 trillion cubic feet which is 21.6 percent below last year’s level and 32.7 percent below the five-year average for this time of the year. The last time the inventories were at a lower level was back in 2014 when they found a bottom at only 824 bcf, but that year the price traded to a high at $6.493 per MMBtu.

Natural gas production is at a record level as it flows from the Marcellus and Utica shale regions of the US. With the price at just over the $2.75 per MMBtu level on Friday, March 22 it is easy to be bearish, but the prospects for the price are not all that negative. The demand side of the fundamental equation points to increasing usage from both power generations and shipments of LNG around the globe. When it comes to technical indicators if 2019 is anything like the past years since 2016 we may have already seen a higher low at $2.543 per MMBtu last month.

Natural gas is moving into the injection season at a price that is a lot closer to the lows than the highs over the past months. While the energy commodity could drift down to the $2.60 per MMBtu level and probe below, the odds favor that any price weakness that takes it to that level would be a buying opportunity.

 

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