Can Natural Gas Rebound?

Andrew Hecht - Barchart - Tue Apr 30, 12:00PM CDT

In a March 27, 2024, Barchart article on the U.S. natural gas market, I asked if lower lows were on the horizon. I explained that the total number of open long and short positions had increased to a level that highlighted an overabundance of trend-following short risk positions that could trigger a short-covering rally. Meanwhile, the bearish trend was pushing prices dangerously close to a new multi-decade low. Nearby NYMEX natural gas futures prices were at the $1.712 per MMBtu level on March 27. At just over the $2.00 level in late April, the nearby futures were higher.

The U.S. Natural Gas Fund (UNG) tracks nearby NYMEX natural gas futures prices.

The bearish trend continues

Since trading at the highest price level since 2008 in August 2022, U.S. NYMEX natural gas futures have been in a brutal bearish trend.

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The twenty-year chart highlights the 84.8% plunge from $10.028 per MMBtu in August 2022 to the most recent February 2024 low of $1.522.

Natural gas rallied as European prices soared to all-time highs due to fears of Russian supply. Favorable weather conditions and abundant supplies sent prices significantly lower since the 2022 peak. U.S. natural gas futures remain mostly under pressure at around the $2 level on the June NYMEX futures contract in late April.

The injection season is underway- Stocks are at a high level

Spring is the shoulder season for natural gas when the demand declines as temperatures do not require significant heating or cooling. Natural gas is a primary ingredient in power generation.

Natural gas stocks typically decline during the winter when heating demand peaks. Inventory withdrawals turn into injections in late March and early April as the temperatures rise.

Over the past years, the amount of natural gas in storage across the United States at the end of the withdrawal season was:

2019: 1.107 trillion cubic feet (tcf)
2020: 1.986 tcf
2021: 1.750 tcf
2022: 1.386 tcf
2023: 1.830 tcf
2024: 2.259 tcf

The data shows that the 2023/2024 withdrawal season ended with the highest inventories in years.

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Source: EIA

As the chart highlights, at 2.425 tcf for the week ending April 19, 2024, natural gas stockpiles across the United States were 22.1% above the previous year and 37% over the five-year average for mid-April. The bottom line is that there are plenty of natural gas supplies to meet the demand.

European prices are under control for now

European natural gas futures have significantly declined from the 2022 highs.

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The chart illustrates the substantial plunge in U.K. natural gas futures.

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Dutch natural gas prices experienced the same price plunge, remaining not far above the recent lows in April 2024.

Open interest remains high- The risk profile is tilted to the short side

Open interest is the total number of open long and short positions in a futures market. A rising metric indicates more hedging and speculative activity; when it falls, it indicates a retreat of market participants.

The U.S. natural gas futures market attracts many speculators when the price trends. The path of least resistance of natural gas prices has been lower since the August 2022 high, attracting trend-following short positions.

The all-time monthly high in U.S. natural gas futures open interest was 1.622 million contracts in September 2018. At over 1.547 million contracts in late April 2024, the open interest points to significant hedging and risk positions. While the trend remains bearish, an overabundant short position could trigger a sudden short-covering rally if bearish market participants decide to exit positions at the same time. The significant open interest could be the most bullish factor for the U.S. natural gas futures market over the coming weeks and months.

Meanwhile, the continuing war in Ukraine threatens European supplies, which could also cause prices to move higher if Russia decides to use natural gas as a weapon against “unfriendly” countries supporting Ukraine.

UNG follows natural gas prices and is a tool if a short-covering rally is on the horizon

The most direct route for a risk position in natural gas is through the CME’s NYMEX division futures and futures options. The U.S. Natural Gas Fund ETF (UNG) moves higher and lower with NYMEX natural gas futures prices.

At $14.73 per share, UNG had over $801.12 million in assets under management. UNG trades over 6.845 million shares daily and charges a 1.11% management fee.

The most recent rally in NYMEX June natural gas futures took the price 12.2% higher from $1.907 on April 16 to $2.140 per MMBtu on April 23.

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Over the same period, the UNG ETF rose 11.8% from $13.87 to $15.50 per share. The UNG does a reasonable job tracking nearby natural gas futures prices on a short-term basis.

Meanwhile, since natural gas futures are highly volatile and trade around the clock, UNG can miss highs or lows when the U.S. stock market is not operating.

Two bullish factors face the bearish natural gas futures arena in late April 2024. While inventories are high, elevated open interest and the war in Ukraine could cause significant upside price variance in the blink of an eye.

On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.