What to Expect from Natural Gas as We Head Into Peak Season

Hurricane Delta hit the same parts of the Gulf Coast as Hurricane Laura before the latest storm came ashore. The price of natural gas rose to a new high for 2020, moved above the November 2019 high, and to the highest level since January 2019 at $2.955 per MMBtu on October 12.

The price pulled back to just above the $2.60 level before returning to settle at almost $2.80 by the end of last week. In the aftermarket on Friday, the price was back below $2.70 per MMBtu. It was a volatile week in the natural gas futures arena.

Natural gas faces bullish and bearish factors as it heads into the peak season for demand. On the bullish side, Warren Buffett’s Berkshire Hathaway (BRK.B) purchased the transmission and pipeline assets from Dominion Energy (D) for $10 billion in cash and assumed debt after the energy commodity traded to a twenty-five-year low in late June. The value investor announced the acquisition in early July, meaning the purchase was at a bargain-basement price.

At the most recent high, just four months later, the price reached a level that was more than double the June low on the continuous futures contract. The price of natural gas has made higher lows and higher highs since late June. However, stockpiles in storage across the United States are rising towards an all-time high as the withdrawal season begins in November. Simultaneously, the peak season for demand will start around the same time that the November 3 election determines the future of US energy policy for the coming years.

The natural gas market’s fundamental and technical position faces influential factors pulling the price in opposite directions, which is a potent prescription for price variance. The United States Natural Gas Fund (UNG) tracks the price of NYMEX natural gas futures.

Stockpiles steam towards a record high

Last week, the Energy Information Administration told the natural gas market that as of the week ending on October 9, 3.877 trillion cubic feet of the energy commodity was sitting in storage across the United States. With approximately five weeks to go before the beginning of the peak withdrawal season, inventories are already at 145 billion cubic feet over last year’s high.

The record high in stockpiles was at 4.047 tcf. An average injection of over 34 bcf over the coming weeks would put the stocks at a new record peak. The bottom line is that there is plenty of natural gas in storage to meet all requirements during the coming winter months. Stocks are not a bullish factor for the natural gas market as we move into the peak season.

The price of natural gas tends to rally during the beginning of the withdrawal season.

Source: CQG

As the chart shows, over the past two years, the natural gas futures market hit peaks in November. In 2018, the high was at the $4.929 per MMBtu level. At the end of the 2018 injection season, inventories rose to a high of 3.234 tcf, which was a low level going into the winter months. In November 2019, the high was at $2.905 per MMBtu, when stockpiles hit a high of 3.732 tcf. In October 2020, the price has already moved marginally above the November 2019 high when it traded to $2.955 per MMBtu on October 12.

Two reasons for caution on the upside, but expect the unexpected

The most compelling reason for natural gas to find the $3 per MMBtu level challenging is the high inventory level going into the 2020/2021 withdrawal season. A move to over the four trillion cubic feet level is likely to have a psychological impact on the market over the coming weeks.

The second reason for upside caution is the overall bearish tone in the energy commodity. As the global pandemic continues, the demand for energy is not likely to boom over the coming months. After trading to a twenty-five-year low in June at $1.432 per MMBtu, short-selling speculators could return to the market above the $3 level over the coming weeks.

A short positional approach to the energy commodity from November 2018 through June 2020 paid off handsomely as the price made lower highs and lower lows. With the price moving towards the $3 level, short sellers are likely licking their chops at the prospects of another early withdrawal season rally to sell.

Meanwhile, the November 3 election comes as the energy commodity enters the peak season for demand in a year where the global pandemic continues to pose a threat with stocks at record levels. A sweep by Democrats could usher in a new era of regulations and a shift in energy policy in the US, the world’s leading natural gas producer. Any limits, reductions, or bans on fracking could prevent stockpiles from reaching the four tcf level in the coming years as production slows.

Anyone who trades in the natural gas futures arena or related ETF/ETN products knows that it is always wise to expect the unexpected in the energy commodity. We are likely to see a continuation of volatility in the coming weeks as the election and COVID-19 present unique factors aside from the elevated level of stocks going into the uncertainty of the 2020/2021 peak season for demand.

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UNG shares rose $0.07 (+0.56%) in premarket trading Tuesday. Year-to-date, UNG has declined -25.62%, versus a 8.35% rise in the benchmark S&P 500 index during the same period.

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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