I've Got a Magic Number for Where Inflation Starts to Run Out of 'Gas'

The natural gas market is one to be left alone for the average retail trader, but even those who aren't speculating in energies directly are doing so indirectly in their stock and bond portfolios (bonds, yikes). Think about it: The cost of energy is the root of inflation. All goods are either made from, made with, or transported with, the help of energy. Even the electricity most of us use to cool our homes in the summer, run a blender or vacuum, or charge an electric car is often coming from natural gas. So, it's a good idea for everyone to keep tabs on the oil and gas markets. Natural gas futures have seen a market rally that was not thought to be possible since the advent of fracking. Before fracking, particularly from 2000 to 2008, the natural gas market was plagued with heart-stopping volatility. But in a post-fracking world, until around last year, volatility was relatively tame and infrequent. All of that changed in 2021 when Europe found itself in the midst of an energy crisis that has been exacerbated by the Russian invasion of Ukraine and oddly inclement weather. In this business, when it rains it pours. It should be noted that this week's buying was likely the result of short covering and gamma squeezing. Speculators have been mostly perpetually short natural gas for years, a trade that has likely paid prior to the fall of 2021. Coming into week, the large speculators on the Commodity Futures Trading Commission's Commitments of Traders report -- the COT Report -- were net short about 120,000 contracts. We suspect they have unwound most of that position under duress, which explains the upward volatility. We have also witnessed a large spike in implied volatility in natural gas call options, this is similar to what was seen in the fall of 2021, but not quite as severe. Nevertheless, market makers or speculators with short call positions have likely been forced to purchase natural gas futures at inopportune prices to hedge their upside risk (Gamma squeeze). In short, much of the buying prior to reaching $9 was by those who needed to buy to alleviate pain, not necessarily by those speculating on higher prices. In the U.S., natural gas resources are abundant, but we lack the infrastructure to bring it to market. Similarly, we are unable to export enough gas to meet the energy needs of Europe due to a lack of infrastructure needed to liquefy, transport, and deliver natural gas across the pond (more specifically, Europe isn't capable of accepting deliveries in the amount needed). Thus, we have to wonder if the rally in U.S. natural gas prices can muster any momentum above $9 on this particular run. That isn't to say that later in the year, or early next year in the dead of winter, we can't see higher prices, but for now technical resistance near $9 will likely hold its ground. The $9 price is significant in that it acted as a ceiling on a handful of occasions in the early 2000s and it also happens to be the location of a downtrend line drawn from the 2005 highs through the 2008 high. Additionally, the monthly chart is showing some Relative Strength Index divergence, which might be a clue that the rally is overextended. Given the lofty pricing and pace of the rally, even a move to $6.50 wouldn't interfere with the overall bullish trend; expect wild two-sided volatility. If the gas price surge pauses or slows down, it could do wonders for market expectations of inflation, as well as actual consumer inflation. Both would be market stabilizing; I think we would all welcome that.

I've Got a Magic Number for Where Inflation Starts to Run Out of 'Gas'

Natural gas is critical to more than energy speculation, and here's where I see this crucial commodity hitting resistance.

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