A Temporary Natural Gas Meltdown Likely

Earlier in the year, the natural gas market was poised for a short covering rally. At the time, there were signs of significant upward potential. We now know the rally was thwarted by a stronger dollar and perpetually weak fundamentals. Contrary to popular belief, demand for natural gas (in the cash market not in regard to retail consumption) occurs in the summer months. By the time fall rolls around, the price support that occurs from seasonal demand is already waning. In fact, natural gas futures tend to dribble lower until October or even mid-November. According to MRCI (Moore Research Center, Inc.), going short a December natural gas futures contract on September 29th and holding through November 15th has produced a profit in 14 of the last 15 years with an average profit of nearly $5,000 before transaction costs. Those familiar with natural gas futures know this equates to a 50-cent decline in prices. We aren't suggesting you take the plunge, but we feel stats like this offer some guidance to traders looking for more conservative ways to play the commodity markets in that it reveals some underlying tendency in price movement. Unfortunately, annual patterns are not speculative guarantees; they are simply a small advantage in putting the odds in your favor. It is also important to point out that seasonal stats such as this tell the positive story while weeding out the hardships. For instance, even if such a date dependent trade turned a profit of $5,000 on any particular year that doesn't mean it was easy money; the trade could have experienced drawdowns of several thousand dollars before the trade became profitable. In a nutshell, it is always a good idea to do your homework and pay attention to timing. It is never a good idea to blindly follow the trading ideas generated by others. Although we acknowledge natural gas prices are getting close to trading-range support, we tend to believe a temporary meltdown is likely as complacent bullish traders are flushed out of the market. The bulls who are left have found comfort in the way natural gas has repetitively held support but their sentiment will change quickly if prices slide below support. In our view, weak seasonals will be the catalyst for this to occur. We don't see any signs of the short trade being overcrowded, nor do we see signs of bullish conviction. For instance, our friends at Consensus Inc. conduct a weekly sentiment poll which suggests that 53% of industry professionals are bullish in natural gas. This figure is unremarkable and offers little guidance. Further, the CFTC (Commodity Futures Trading Commission) pegs the number of large speculators short the natural gas market at roughly 66,000. This too is relatively neutral. Chart Source: QST Indecisive sentiment readings and low volatility are often a sign of future volatility. If so, we suspect that due to a lack of seasonal support volatility will come in the form of a sell-off. The weekly chart points toward a looming probe toward $2.60 with the possibility of follow-through selling into the $2.30 area. We would be interested in considering a bullish stance from the former and would be willing to get aggressive with such at the latter. *THERE IS A SUBSTANTIAL RISK OF FINANCIAL LOSS IN TRADING FUTURES AND OPTIONS.

A Temporary Natural Gas Meltdown Likely

Weak seasonality could force a natural gas price flush.

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