Natural gas reached a higher low at $1.605 per MMBtu on July 20. The move from $1.924 on July 7 ran out of steam on the downside. The energy commodity did not test the double bottom formation at $1.517 from June 25 and 26.

On Friday, July 24, the price was hovering around the $1.80 level. The most recent high was at $1.818. Short-term technical support and resistance are at the most recent low and high. The odds favor a continuation of the upward trajectory of the natural gas futures market over the coming sessions. While a move to the $2 level or higher could be in the cards, the market’s fundamentals will likely cap the upside potential.

The short-term ProShares Ultra Bloomberg Natural Gas product (BOIL) offers double leverage on the upside in the energy commodity.

The fourth consecutive decline in inventory builds

On Thursday, July 23, the Energy Information Administration reported an injection of 37 billion cubic feet of natural gas into storage across the United States.

Source: EIA

As the chart illustrates, total stockpiles rose to 3.215 trillion cubic feet, 25.6% above last year’s level, and 15.7% over the five-year average for this time of the year.

The data from the week ending on July 17 marked the fourth straight week of declines in inventory injections, which is a sign of either rising demand or falling production. According to Baker Hughes, the number of natural gas rigs operating in the United States as of July 24 was 68compared to 169last year at the same time.

A marginal bounce in the price

After trading to the most recent low, the price moved a bit higher.

Source: CQG

The chart shows that the price was just below $1.80 after probing above that level. Both price momentum and relative strength indicators turned higher and were above neutral readings on July 24. Open interest, the total number of open long and short positions in the natural gas futures market was flatlining around the 1.302 million contract level. Daily historical volatility at 48.8% had dropped from over 82% in early July as the price retraced higher.

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Natural gas is attempting to reverse the pattern of lower highs and lower lows that has been in place since early May. A move above the $1.924 per MMBtu level is necessary to shift the price action to a bullish trading pattern.

Four trillion cubic feet of supplies on the horizon

After the latest inventory data from the EIA, there are approximately twenty-one weeks until the start of the withdrawal season when stockpiles decline during the winter months. At 3.215 trillion cubic feet, an average injection of 37.4 billion cubic feet would push total inventories above the four trillion level for the third time in recent years.

Last year, the stocks rose to a high of 3.732 tcf in November. In 2018, they peaked at 3.234 tcf. In 2018 and 2019, the price rose to a high of $4.929 and $2.905 per MMBtu, respectively. A rise to over four tcf in November will likely limit the upside potential for the price of the energy commodity over the coming weeks and months. However, natural gas still has plenty of room to recover at below the $1.80 level on July 24.

The August-January spread reflects seasonality in natural gas

The price differential between natural gas for delivery in August 2020 and January 2021 is a function of both the high level of stockpiles and the energy commodity’s seasonality. The price of natural gas tends to peak at the beginning of the withdrawal season each year when stocks decline. The uncertainty of the winter temperatures and the demand for heating is a bullish factor each year.

Source: CQG

The chart shows that at $1.10 per MMBtu, January futures were trading at a 61.8% premium to natural gas for August delivery. January futures at the $2.88 per MMBtu level was below the high for 2019 at $2.905.

While we are not likely to see natural gas venture over the $3 level anytime soon, the target on the upside could act as a magnet for the price of the energy commodity.

Source: CQG

The weekly chart highlights that a reasonable upside target in the natural gas futures market is the early May high of $2.162.

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Source: CQG

The daily chart shows that a double top formation at $2.11 from May 18 and 19 could be a formidable resistance level. Therefore, any long positions at $1.80 or lower should have a profit target at $2.00-$2.10 per MMBtu, which is over 11% above the current price.

BOIL is the short-term trading tool

The most direct route for a risk position in the natural gas market is via the futures and futures options that trade on the NYMEX division of the CME. Since Credit Suisse delisted the UGAZ and DGAZ triple leveraged natural gas ETN’s the ProShares Ultra Bloomberg Natural Gas product (BOIL) and its bearish counterpart (KOLD) are now the best options when it comes to leveraged products that avoid the need to venture into the futures arena.

The fund summary and most recent top holdings of BOIL include:

Source: Yahoo Finance

BOIL has net assets of $50.6 million, trades an average of 496,850 shares each day, and charges a 1.31% expense ratio. The net assets and average volume have been growing since UGAZ became unavailable.

The price of August natural gas futures rose from $1.605 on July 20 to a high of $1.818 on July 24 or 13.27%.

Source: Barchart

Over the same period, BOIL appreciated from $23.61 to $30.17 per share or 27.78% or just over twice the percentage move in the august futures.

Natural gas is not running away on the upside any time soon; stockpiles are too high even though there are signs that production is slowing. However, a recovery to above the $2 per MMBtu level could be in the cards and risk-reward favors the upside at $1.80 or lower on the nearby futures contract.

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The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.



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