In 2022, nearby continuous NYMEX natural gas futures contract has traded in a $6.39 per MMBtu range in 2022. The differential between the low and high is massive, considering natural gas futures fell to a quarter-of-a-century $1.44 per MMBtu low in June 2020. At the most recent high, the energy commodity was nearly seven times higher than the 2020 bottom, and at $5.90 per MMBtu on October 17 on the November contract, it was still over four times higher than the low. 

Natural gas is moving into the peak demand season during the winter, with the price action gyrating between explosive and implosive periods. Buckle your seatbelts for a wild winter ride in the energy commodity, as the price action tends to take no prisoners. 

US inventories are lower than in previous years going into the peak season

While the recent injections into natural gas storage across the US have increased, the supplies remain below earlier years as of the week ending on October 7, 2022. 

Source: EIA

As the chart shows, at 3.231 trillion cubic feet, natural gas stockpiles were 3.8% below last year and 6.4% below the five-year average as of October 7. Over the past weeks, we have seen four consecutive injections over the 100 bcf level. Before the week ending on September 16, 2022, the last triple-digit injection into storage was a one-off 102 bcf increase in June. Before that, weekly inventories did not rise by over 100 bcf since October 2021. The demand for natural gas processing into LNG for export has caused the flow into storage to decline. 

Meanwhile, as of the week ending on October 14, 157natural gas rigs were operating in the US, 59 higher than in mid-October 2021. While the number of rigs increased by over 50%, the amount of gas in storage remains lower than last year as rising natural gas prices in Europe and Asia have increased import demand for less expensive US LNG. 

The injection season ends next month

Natural gas is a highly seasonal energy commodity that tends to reach price peaks as the uncertainty of heating demand during the winter causes increased hedging and speculative activity. A frigid winter can cause inventories to decline quickly, while warmer temperatures have the opposite impact on supplies. The injection season will wind down in November, and stocks will begin to decline. 

At the 3.231 trillion cubic feet level on October 14, natural gas supplies are still below the levels at the start of the peak season over the past four years:

• In 2018, stocks rose to 3.234 tcf at the end of the injection season.
• In 2019, the high was 3.732 tcf at the start of the withdrawal season.
• In 2020, the peak was 3.958 tcf.
• Last year, in 2021, the high was 3.644 tcf in November.

With the start of the withdrawal season around one month away, stocks will likely be above the 2018 level but below the levels seen over the past three years when demand begins to outstrip production and inventories decline. 

European prices are high and could soar because of the ongoing war 

While a cold winter will likely push US natural gas prices higher over the coming months, there is enough natural gas in storage to meet the seasonal requirements. Meanwhile, Western Europe is another story as it has depended on the pipeline network that sends gas supplies from Russia to consumers. 

As the winter approaches, European gas prices remain at multi-year highs. 

While nearby UK natural gas prices have substantially dropped from the March 2022 peak, the price for December delivery remains appreciably above the pre-2021 all-time high. 

Natural gas prices for December delivery in the Netherlands are also above the pre-2021 record peak. A cold winter could send prices even higher and challenge the March 2022 peaks for the UK and Dutch natural gas.

Russia will likely continue to use gas supplies as a retaliatory economic weapon against “unfriendly” countries providing military and financial support to Ukraine. Natural gas is the energy commodity in the crosshairs of the Russians as the 2022/2023 winter approaches. 

Levels to watch in the US natural gas futures arena

Before technology allowed LNG to travel by ocean vessels worldwide, US natural gas was a domestic market as the pipeline network limited its scope. LNG has made the US natural gas prices far more sensitive to the supply and demand fundamentals in worldwide markets. After a $6.39 per MMBtu range in the US natural gas arena in 2022, we are now coming into the peak demand season, which could mean even more volatility could be on the horizon. 

The chart shows that US natural gas for December delivery was at the $6.38 per MMBtu level on October 18. Technical support stands at the July 6 $5.599 low, with technical resistance at the August 23 $10.119 per MMBtu high, the highest price since 2008. At the $6.38 level, natural gas is below the midpoint, which stands at $7.859, the first technical upside target for the December contract. 

Expect lots of volatility in the natural gas market during the 2022/2023 peak demand season. The energy commodity has a lot more to worry about than the weather conditions and temperatures in the US during the coming withdrawal season. 

BOIL and KOLD are short-term trading tools for those not willing to venture into the futures arena

Volatility is a nightmare for static investors, but it creates a paradise of opportunities for flexible traders with their fingers on the pulse of markets. In 2022, natural gas futures market trends have offered significant trading profits as explosive and implosive price action has led to massive percentage moves. 

The most direct route for a risk position in the US natural gas market is via the futures and futures options on the CME’s NYMEX division. The ProShares Ultra Bloomberg Natural Gas Bullish ETF (BOIL) and its bearish counterpart (KOLD) provide an alternative for those looking to participate in the wild natural gas market without venturing into the highly leveraged futures arena. BOIL and KOLD are only appropriate for short-term risk positions on the long or short side of the natural gas market as they provide double leverage to nearby prices. The products suffer from time decay when prices move in the opposite direction or remain stagnant. 

At the $43.02 per share level on October 18, BOIL had $280.268 million in assets under management. The product trades an average of over 2.972 million shares daily and charges a 0.95% management fee. KOLD, at $20.29, had $220.839 million in assets under management. The bearish ETF trades an average of over 8.24 million shares daily and charges the same 0.95% management fee. 

The most recent price move in natural gas was an implosion that took the price of nearby November NYMEX futures from $9.292 per MMBtu on September 14 to a low of $5.869 on October 18, a 36.8% decline.

Over the same period, the bearish KOLD product rose from $9.82 to $20.31 per share or 106.8%. The KOLD ETF delivered far more than double leverage over the period and BOIL also provides upside leverage when natural gas prices rally. 

Two cautions about these products are decay and timing. ETF and ETN products that provide leverage use options to create the gearing, causing them to decay over time. Meanwhile, natural gas futures trade around the clock during the business week, while BOIL and KOLD are only available for trading during hours when the stock market operates. BOIL and KOLD may not reflect highs or lows when the stock market is not operating. 

Fasten your seatbelts for a wild period in the natural gas markets, as a lot more than the weather will dictate the path of least resistance over the coming weeks and months. We could be in for a continuation of price explosions and implosions during the peak demand season in 2022/2023.  

• Crude Slightly Lower on Chinese Energy Demand Concerns
• Nat-Gas Slumps on Weak European Prices and Forecasts for Warm U.S. Temps
• Crude Slightly Higher on Dollar Weakness and Strength in Stocks
• Coal Prices as a Winter of Discontent Descends on Europe