Medium Term / Buy
Head of Commodity Strategy
Summary: This week natural gas broke back above $3/therm after once again finding strong support below. We look to buy on a weekly close above $3.053 as this could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.
Instrument: US Natural Gas (NGX8 or NATGASUSNOV18)
Price Target: Open
Market Price: 3.039
This week, natural gas broke back above $3/therm after once again finding strong support below. A weekly close above $3.053 could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.
Entry: Market or weekly close above $3.053/therm
Stop: Trailing stop of $0.14/therm (equivalent of 2 ATR)
Time Horizon: Medium-term
On Thursdays, the US Energy Information Administration publishes its Weekly Natural Gas Storage Report which shows the amount of gas that goes in and out of storage. What we have seen during the past few months are lower than normal injections into storage, as consumption and exports have stayed strong relative to production.
As of last week, following another lower than expected injection, the total amount of gas in storage reached 2,768 billion cubic feet (Bcf) which is some 18.3% below the five-year average of 3389 bcf. With time running out to replenish stocks before November, we could see a market increasingly being left exposed should the US winter prove to be colder than expected.
From having been a horrendously expensive investment for passive long investors for years due to the structure of the futures curve, there are now emerging signs that a change is on the way, not least due to the ever-increasing amount of Liquified Natural Gas exports. The emerging tightness has seen the one year futures spread (1st minus 13th futures contract) move into a solid backwardation of 10% compared to a contango which at it worst point back in 2015 went above 50%.
In other words, an investor back then would need a 50% return on a one-year horizon before making any money.