Is It Time To Buy Natural Gas?

Is It Time To Buy Natural Gas?

Natural gas has generated high-profit short sale opportunities for years, with the futures contract stuck in a secular bear market that shows no signs of letting up. However, a look at history reveals that pricing periodically spikes 400% to 600% in relatively short time frames, with the last torrid rally taking place between 2012 and 2014.

Another vertical buying spike may be in the cards in 2016 or 2017, as a counter-reaction to broad selling pressure that’s dragged down the entire commodity complex in 2014 and 2015. Crude oil, heating oil and unleaded gasoline futures have all joined natural gas in major declines while metals and agricultural contracts have also lost considerable ground.

This downside convergence could yield a climax that prints corrective lows, ahead of an extended period of consolidation and recovery. In turn, that should mark a good time to consider long positions throughout the commodity complex. While contracts may not return to highs posted in the last decade, even proportional recovery waves could offer favorable positions.

Natural gas stands to benefit greatly from this recovery because it’s given up a greater percentage of value than its energy, metals or agricultural peers and is likely to recover losses in the vertical pattern that’s shown up many times in the past. However, the biggest risk will come in being too early rather than too late, given continued downsidemomentum.

Natural Gas History and Outlook

Natural gas traded in a relatively narrow band through the first half of the 1990s and shot higher in 1996, doubling in price. It gave up those gains into 1999 and took off in a vertical thrust that carved out a 500% rally. The contract crashed back to earth in 2000, once again giving up all of its gains. Price action into 2009 printed three additional buying spikes, with each rally booking gains in excess of 300%.

The 2009 recovery attempt got capped near 6.00 at the end of the year, with the subsequent decline continuing into March 2012 and a test of the 2001 low near 2.00. Long-term support held, but the buying spike into early 2014 failed to pierce new resistance created by the 2009 high. The contract returned to 2001 and 2012 support in 2015 and broke those levels into year’s end.

The contract’s repeated buying spikes are unique in the energy complex, which tends to draw classic uptrend and downtrend patterns. It highlights the commodity’s seasonal nature and how easily sellers can be trapped when adverse weather information upsets popular opinion. It also tells us to expect this type of price action to unfold once again, brutally squeezing shorts.

The long-term chart shows substantial support at 2.00, 1.60 and 1.30. The contract pierced 2.00 in November 2015, setting its sights on support at the next downside target. The breakdown has increased downside pressure, taking out logical stops placed just below that level. This added volatility could bring the 1.60 level in play in the first quarter of 2016.

The contract’s bottom could align with the seasonal calendar because a record breaking El Nino in the Pacific Ocean has intensified the current selling wave, raising east coast temperatures while lowering the need for gas heating. Even so, it isn’t too early to pay attention to downside targets, looking for pockets of buying interest.

Measuring El Nino’s Impact

El Nino may affect the contract into the second quarter of 2016 when the heating season comes to an end. Observant market players and technicians can build useful sentiment data while this impulse unfolds by watching price action whenever the National Weather Service updates long-term forecasts that have a substantial impact on contract pricing during the winter months.

Volume and volatility are likely to rise on the futures contract and US Natural Gas Fund (UNG) when NWS issues a forecast that changes or updates the long-term outlook. While warm conditions could prevail through the winter, any prediction of colder than expected temperatures in natural gas heating venues should have an immediate and beneficial effect on pricing.

Perform a convergence-divergence analysis if that happens, looking for a strong rally that indicates convergence and a positive change in sentiment. A failure to rally after a bullish long-term forecast will point to divergence and structural weakness that’s likely to persist. Natural gas is unlikely to bottom in the first half of 2016 if the winter gets cold and the contract fails to respond with a vigorous recovery.