'Widow Maker' Natural Gas Market Is Poised for a Recovery

We often refer to the natural gas market as the widow maker. Late 2018 trading reminded us of why the reference is appropriate. We know of at least one large hedge fund that blew up in November largely at the hands of an out-of-control futures and options markets. In fact, we believe it was the hedge fund liquidation itself that triggered the latter part of the parabolic rally. In any case, market prices thrashed violently for weeks, all but ensuring most speculators on both sides of the coin didn't survive before collapsing to the precise levels the chaos began. Enduring natural gas speculation in recent months required a fair amount of savvy when it comes to risk management, a well-funded trading account, and nerves of steel. We suspect that going forward market volatility will be more tolerable, and perhaps more predictable. Because natural gas futures aren't nearly as liquid as the stock market, Treasuries, or currencies, pricing is more vulnerable to temporary volatility at the hand of a few market participants, or even a particular strategy being employed by large numbers of participants. Deeper markets can experience similar price manipulation, but it is generally less frequent and severe. In November 2018, the natural gas market rose parabolically. The move began on news of colder-than-expected temperatures and a short-term supply pinch but ended in margin call liquidation chaos. In our estimation, the rally from $2.90 MMbtuu to $3.70 can be legitimately argued with fundamentals, but the incremental move to $4.60 and the subsequent switchback trading spanning from $4.60ish to $3.70ish had nothing to do with logic - rather, it was the result of speculators and funds being painfully squeezed out of positions. Further, we suspect the slide below $3.50, which seems to have found support near $2.75, was similarly artificial and created by long liquidation at the hands of margin pressure. As a result of the perpetual selling, natural gas prices are severely oversold according to standard oscillators such as the RSI (Relative Strength Index). If our assumptions and analysis are accurate, a fair price for natural gas is above $3.00 and probably closer to $3.50. View Chart » View in New Window » Source: QST If you follow seasonals as closely as we do, you are probably aware of the fact that natural gas generally moves lower throughout January and February. This is in contrast to our technical and market composition analysis, but we aren't overly concerned because the natural gas market has traded counter-seasonal since early November. Gas prices generally enter the new year with lofty prices, not bargain-basement pricing, thus it is reasonable to expect higher prices out of the trough in the face of weak seasonal tendencies. In short, seasonal trends haven't worked in this market for several months, so they probably won't begin to work now while prices are low in the heart of the cold weather season. We also like to look at the CFTC's (Commodity Futures Trading Commission) COT (Commitments of Traders Report) to see where speculators of all sizes (large and small) are positioned, but due to the government shutdown, we do not have access to this data. Nevertheless, based on price action our guess is that the November rally successfully flushed out the complacent shorts and the subsequent plunge has likely eliminated the weak longs. Now that the slate is wiped clean, we believe the bulls will look to establish fresh positions.

'Widow Maker' Natural Gas Market Is Poised for a Recovery

At least one large hedge fund blew up in November largely at the hands of an out-of-control futures and options markets.

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