$2.00 Natural Gas Is a Real Possibility

The liquification of the exportation of U.S. natural gas resources is a work in progress. In the meantime, however, the domestic natural gas glut continues. Further, news of a gas pipeline from Russian to China is being viewed by traders as future demand destruction for U.S. fracked gas. Of course, the weak fundamental landscape is being, arguably irrationally, exaggerated by thin holiday trading volume. Nevertheless, the long liquidation could continue in the short run. Retail traders are generally surprised to learn that natural gas prices tend to soften in November and December. However, some years see a sharp November rally prior to that weakness. This is because end-users typically purchase natural gas in advance of the winter season causing prices to firm up but as the winter progresses, prices decline unless unexpected weather causes excessive consumption of the energy. According to our friends at MRCI (Moore Research Center, Inc.) the 15-year natural gas futures price generally declines through late December, after temporary price spikes in October and November as traders analyze the weather. With this pattern in mind, barring any extreme weather, it is possible natural gas prices continue to slump in the short run. Source: MRCI The Commitments of Traders Report issued by the CFTC (Commodity Futures Trading Commission) gives us a glimpse into which type of traders (large or small speculator and hedger) are holding net long or short positions. Currently, large speculators, which consist of those trading large accounts and sizable positions, are net short natural gas futures. However, they aren't holding the aggressive positions they were earlier in the year. Specifically, this group of traders known as the smart money is holding roughly 140,000 net short contracts relative to a holding of 212,000 net short contracts heading into the fall. In our view, this leaves room for additional speculative selling. Further, those long the market are likely starting to rethink their position and could be spooked into continued liquidation. Source: Barchart The weekly chart of natural gas depicts a market with room to move on the downside. Long-term trendline support won't be seen until $2.00 gas is seen. Additionally, the Relative Strength Index is pointing decisively lower with plenty of room for prices to weaken before the market becomes oversold. We have also noticed this year's attempt at a November rally was dismal, unlike others in 2016 and 2018. This could discourage the bulls and eventually lead to a retest of recent lows or lower before the market has a good chance at finding its footing. Source: QST Some might read this analysis and take it as a recommendation to go short, but that is not what we are saying. We always remind readers of the fact that natural gas is a trader's market and the most explosive moves come to the bulls from discounted prices. Accordingly, we are simply saying those on the sidelines wishing to get long should do so with the assumption that $2.00 could easily be seen so small position sizing and hedging makes sense for now. But if prices approach $2.00 it might be time to become more aggressive on the long side of the market. What's more, those who have found themselves to be long at the wrong time, should continue to hedge positions to cushion the blow because things will likely get worse before they get better.

$2.00 Natural Gas Is a Real Possibility

Retail traders are generally surprised to learn that natural gas prices tend to soften in November and December.

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