December Futures Rally on Early Cold Snap, but Supplies are Plentiful
Henry Hub Natural Gas futures made a run for $3.00 earlier this month, but have since backed down as record production from shale basins sets the market up for continuous, uninterrupted supply.
EIA Natural Gas inventory data released yesterday showed stable inventories week-over-week, which the market was expecting. The cold snap that gripped much of the U.S. in early November was blamed for failure to build stocks at the five-year average for this time of year, when we typically see an inventory build of 30 billion cubic feet. Early calls for the next weekly inventory update look for a drawdown of 90 billion cubic feet, according to Bloomberg.
The recent Energy Information Administration Short-Term Energy Outlook sees muted production increases in 2020 due to low prices in 2019. Some drilling projects considered for early 2020 may have been shelved due to the lower prices in the market over the last half of this year. Even so, the production side of the equation is well positioned to deliver ample supplies with output running at near-record levels.
Weekly updates on supplies come every Thursday when the U.S. Department of Energy’s Energy Information Administration updates estimates of U.S. natural gas in underground storage. Updates are released at 10:30 a.m. ET with data for the week ending the previous Friday.
Demand for natural gas comes primarily from our need to create electricity, but also from residential heating which ramps up during cold weather. Other demand comes from industrial and commercial consumption.
The recent EIA Short-Term Energy Outlook calls for slightly higher demand going forward, likely due to less pessimism about economic conditions. Power-plant demand and industrial demand forecasts were both revised up. The report revised spot natural gas price estimates from $2.57 to $2.60.
Weather forecasts from the National Oceanic and Atmospheric Administration can provide data that traders utilize in decision-making. Outlooks for 6 to 10 days out, along with 8 to 14 days out are refreshed daily on the NOAA.gov website between 3:00 p.m. and 4:00 p.m. ET. Weekday forecasts involve some human interpretation as forecasters may modify computer-driven outlooks, while weekend updates are completely automated.
Current forecasts look for a mixed bag, with the 6-10 day outlook slightly colder than normal, but the 8-14 day forecast mostly normal or warmer.
CFTC Commitment of Traders Data
Each Friday at 3:30pm ET the CFTC releases the Commitments of Traders Report, providing data that reveals a partial glimpse of who’s doing what in futures markets. The report is a snapshot of open interest as of the prior Tuesday’s session, so data is delayed to some degree.
According to these CFTC reports, natural gas futures net bearish positions by money managers have been present for the last six months. The most recent data, dated November 5, revealed net-short contracts equivalent to 98,142 contracts, marking a second straight week of decreasing short contracts. Net short positioning exceeded 210,000 contracts twice now in the last three months, but both times bounced back to more moderate levels. Data from mid-August showing over 235,000 net short contracts came within a whisker of the all-time biggest short ever, which still stands at 237,812 short contracts in June of 2008.
Natural Gas Futures
Henry Hub refers to the central delivery location located near the Louisiana Gulf Coast which connects several intrastate and interstate pipelines. Henry Hub has been used as a pricing reference for futures for the last 30 years.
Over the last month, the CME’s Henry Hub Natural Gas Futures generated average daily volume of roughly 500,000 contracts per day. Each futures contract controls delivery of 10,000 million British thermal units (Btu). While most commodity contracts measure product in pounds, bushels, or other volume or weight measurements, Btu’s explain how much combusted gas would be needed to create the heat to raise the temperature of a pound of water by one degree Fahrenheit. The December 2019 futures contract recently traded at $2.66/MMBtu.
Watching the Widowmaker
The notorious futures spread involving March 2020 & April 2020 Natural Gas is worth monitoring here. In general, buying March Natural Gas and selling April Natural Gas could provide good results with a colder-than-expected spring. The opposite trade could reward those speculating on warmer spring temperatures.
Natural Gas Research
Traders involved in Natural Gas futures and options often watch a diverse set of variables including:
- EIA weekly reports. Supply and storage data is typically released Thursday mornings at 10:30 ET
- GDP data. Strength of U.S. economy is a variable impacting demand for natural gas
- Weather. Events can impair production sites and impact storage levels and demand
- EIA Crude Oil reports. On a relative basis, cheaper oil can become a natural gas substitute
- Global events. War, elections, financial turbulence, political bias can affect natural gas policy and supply/demand balance.
Trading Natural Gas Futures Options
Options traders will find a deep, liquid market for Natural Gas Futures Options. The monthly options expire near month’s end and enjoy high participation.
Implied volatility for Natural Gas Futures Options varies depending on the time horizon. Near-the-money options expiring November 25 show implied volatility in the low 50’s, while similar options that expire at the end of January and February have IV creeping into the mid 50’s.
Technicals December 2019 Natural Gas Futures
The pivot analysis has first resistance around 2.66 and then 2.72 while 1st support comes in at 2.55 and below there at 2.507. Pivot point is 2.617. Those watching the January futures trade above the 60-day moving average may see a positive long-term trend.
Resistance 2 2.727
Resistance 1 2.663
Support 1 2.553
Support 2 2.507
20-day SMA 2.629
50-day SMA 2.622
200-day SMA 2.752
10-day RSI 52%
Retail Sales 11/15/2019 8:30 a.m. ET
Housing Starts 11/19/2019 8:30 a.m. ET
EIA Natural Gas Report 11/21/2019 10:30 a.m. ET
Natural Gas Futures Options Expire 11/25/2019