On October 18th, I wrote a piece here suggesting buying natural gas futures (NG) at around $2.35. That was based on a major technical signal known as a golden cross, where the 50-day moving average crossed over the 100-day. That worked out well as, after a short dip that didn't reach the proposed stop level, NG climbed, hitting $2.90 a few weeks later before turning again. The idea was to institute a fairly tight trailing stop on a break of $2.40 and if you did that, it was a good trade. You would be out by now though, and I have left the subject alone during the retracement…until now.
As I said, the trigger for that trade was the crossover, but it was also backed up by some fundamental factors, most notably being a leveling off of U.S. production of natural gas. It is not that output isn't high, it's just that the rate of growth has slowed. That was almost inevitable. As cheap and accessible as natural gas has become, a sustained period of low prices had to have an effect at some point. The depth of the impact was illustrated this week when Chevron (CVX) announced that it was taking a $10 billion charge in their Q4 earnings related to writing off some natural gas assets.
That was seen as bad news initially by the futures market, but interestingly, prices recovered quickly and are now above their level at the time that announcement came. The bounce-back makes more sense than the drop and can be expected to continue. CVX was the first big company to dial…
On October 18th, I wrote a piece here suggesting buying natural gas futures (NG) at around $2.35. That was based on a major technical signal known as a golden cross, where the 50-day moving average crossed over the 100-day. That worked out well as, after a short dip that didn't reach the proposed stop level, NG climbed, hitting $2.90 a few weeks later before turning again. The idea was to institute a fairly tight trailing stop on a break of $2.40 and if you did that, it was a good trade. You would be out by now though, and I have left the subject alone during the retracement…until now.
As I said, the trigger for that trade was the crossover, but it was also backed up by some fundamental factors, most notably being a leveling off of U.S. production of natural gas. It is not that output isn't high, it's just that the rate of growth has slowed. That was almost inevitable. As cheap and accessible as natural gas has become, a sustained period of low prices had to have an effect at some point. The depth of the impact was illustrated this week when Chevron (CVX) announced that it was taking a $10 billion charge in their Q4 earnings related to writing off some natural gas assets.
That was seen as bad news initially by the futures market, but interestingly, prices recovered quickly and are now above their level at the time that announcement came. The bounce-back makes more sense than the drop and can be expected to continue. CVX was the first big company to dial down its natural gas exposure, but it is unlikely to be the last and a drop off in enthusiasm will reduce supply over time.
Basic supply and demand theory indicates that that will push prices higher, providing of course that demand is at least maintained. In the U.S. market, that looks likely to happen.
The reason for that assertion is contained in the chart above. The U.S. is now a net exporter of gas, and as the infrastructure build-out that has enabled that to happen continues, so will that trend. These are long-term influences that won't affect the day-to-day pricing, but the trend remains in the background and makes a positive price response to supply reductions much more likely.
So, at a slightly lower level than the entry point for October's trade, natural gas is a buy again. After that run-up, the drop back set a new recent low of $2.1580, so I would use that as the basis for a stop this time, with the initial target once again a run-up to around $2.40. Again, if that level is attained, it would prompt an adjustment rather than a cut, with a move to a tight trailing stop.
The U.S. natural gas market has been oversupplied for some time, but, considering that, prices have held up well after the August low. With signs of capitulation from some big players and continued expansion in exports, bounces will become more frequent, and now is a good time to position for one.
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