So far we’ve covered Natural Gas twice, once in October 2022, followed by another in May 2023.
As highlighted in both pieces we are generally longer-term bullish on natural gas but we do see some opportunities for a short-term tactical position now.
As winter approaches, the harrowing memories of natural gas price movements during the previous winter seasons keep us vigilant. Some key points we find interesting now include the natural gas storage levels in the EU and US, unseasonal weather, price seasonality, and natural gas price action.
Natural gas storage
Natural Gas storage typically follows two clear seasonal trends: the winter withdrawal season and the summer injection season, with the summer months being April to October and winter from November to March.
The chart below shows the storage level across time in the US. Current US Storage levels are close to the previous high in 2020.
While in the EU, current gas storage levels are the highest they've been over the last five years.
These high storage levels come off the back of a massive rally in natural gas prices in the 2021-2022 period. Which leads us to question, could this be attributed to recency bias? Have markets become over-prepared, with storage levels so high?
Unseasonal weather
One rationale for high storage levels is preparation for a harsh winter. The build-up of gas storage in the EU, particularly, was spurred by a warmer-than-expected start to the winter, resulting in less gas usage for heating.
Forecasts also predict the 2023 winter in the EU & US to be warmer than average. A recent Bloomberg article on Natural Gas states:
“Data generated by the Copernicus Climate Change Service signals a minimum 50% probability that most of Europe will experience well-above average temperatures between December and February. The Balkans, Italy and the Iberian peninsula have a 60% to 70% chance of exceeding median historical temperatures over the past three decades.”
The EIA adds:
“We estimate that U.S. natural gas inventories totaled 3,835 billion cubic (Bcf) feet at the end of October, 6% more than the five-year (2018–2022) average. We forecast U.S. natural gas inventories will end the winter heating season (November–March) 21% above the five-year average with almost 2,000 Bcf in storage. Inventories are full because of high natural gas production and warmer-than-average winter weather, which reduces demand for space heating in the commercial and residential sectors.”
High storage levels, coupled with lower-than-expected demand due to warm weather, could signal further weakness for Natural Gas…
Price Seasonality
Adding to this is the general price seasonality of Natural Gas. Over the past six years, the August to end-of-October period generally sees a gradual rise, followed by a decline from December to January. With this year’s price behavior aligning with past trends, we could very likely see a downturn in prices heading towards the end of the year and into January.
Price Action
On a longer-term time frame, the 3.610 level has repeatedly served as both support and resistance.
On a shorter timeframe, natural gas has been trading in a defined broadening formation, likely indicating increased price volatility.
To express our short-term bearish view, we can take a short position on the CME Henry Hub Natural Gas Futures at the current level of 3.089, setting the stop at the resistance above at 3.26 and take profit of 2.62. Each 0.001 point move in the Henry Hub Natural Gas Futures is for 10 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.eia.gov/tod...ergy/detail.php?id=2050
www.bloomberg.c...ted-until-2026/?utm_medium...
www.eia.gov/outlooks/steo/
www.bloomberg.com/ne...rt-to-winter-weather
www.bloomberg.com/ne...sonably-warm-outlook
www.cmegroup.com/mar...s.contractSpecs.html
As highlighted in both pieces we are generally longer-term bullish on natural gas but we do see some opportunities for a short-term tactical position now.
As winter approaches, the harrowing memories of natural gas price movements during the previous winter seasons keep us vigilant. Some key points we find interesting now include the natural gas storage levels in the EU and US, unseasonal weather, price seasonality, and natural gas price action.
Natural gas storage
Natural Gas storage typically follows two clear seasonal trends: the winter withdrawal season and the summer injection season, with the summer months being April to October and winter from November to March.
The chart below shows the storage level across time in the US. Current US Storage levels are close to the previous high in 2020.
While in the EU, current gas storage levels are the highest they've been over the last five years.
These high storage levels come off the back of a massive rally in natural gas prices in the 2021-2022 period. Which leads us to question, could this be attributed to recency bias? Have markets become over-prepared, with storage levels so high?
Unseasonal weather
One rationale for high storage levels is preparation for a harsh winter. The build-up of gas storage in the EU, particularly, was spurred by a warmer-than-expected start to the winter, resulting in less gas usage for heating.
Forecasts also predict the 2023 winter in the EU & US to be warmer than average. A recent Bloomberg article on Natural Gas states:
“Data generated by the Copernicus Climate Change Service signals a minimum 50% probability that most of Europe will experience well-above average temperatures between December and February. The Balkans, Italy and the Iberian peninsula have a 60% to 70% chance of exceeding median historical temperatures over the past three decades.”
The EIA adds:
“We estimate that U.S. natural gas inventories totaled 3,835 billion cubic (Bcf) feet at the end of October, 6% more than the five-year (2018–2022) average. We forecast U.S. natural gas inventories will end the winter heating season (November–March) 21% above the five-year average with almost 2,000 Bcf in storage. Inventories are full because of high natural gas production and warmer-than-average winter weather, which reduces demand for space heating in the commercial and residential sectors.”
High storage levels, coupled with lower-than-expected demand due to warm weather, could signal further weakness for Natural Gas…
Price Seasonality
Adding to this is the general price seasonality of Natural Gas. Over the past six years, the August to end-of-October period generally sees a gradual rise, followed by a decline from December to January. With this year’s price behavior aligning with past trends, we could very likely see a downturn in prices heading towards the end of the year and into January.
Price Action
On a longer-term time frame, the 3.610 level has repeatedly served as both support and resistance.
On a shorter timeframe, natural gas has been trading in a defined broadening formation, likely indicating increased price volatility.
To express our short-term bearish view, we can take a short position on the CME Henry Hub Natural Gas Futures at the current level of 3.089, setting the stop at the resistance above at 3.26 and take profit of 2.62. Each 0.001 point move in the Henry Hub Natural Gas Futures is for 10 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
www.eia.gov/tod...ergy/detail.php?id=2050
www.bloomberg.c...ted-until-2026/?utm_medium...
www.eia.gov/outlooks/steo/
www.bloomberg.com/ne...rt-to-winter-weather
www.bloomberg.com/ne...sonably-warm-outlook
www.cmegroup.com/mar...s.contractSpecs.html
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