Natural Gas: Shake Off Those Inventory Numbers
http://seekingalpha.com/article/3190126-natural-gas-shake-off-those-inventory-numbers
(Posting excerpts on NG - an interesting read)
Natural gas futures had yet another good run last week. The price of what is perhaps the world's most volatile commodity moved higher in the face of the largest inventory injection this year. On Thursday, May 14, the Energy Information Administration reported that inventories rose by 111 billion cubic feet to 1.897 trillion cubic feet. Stockpiles now stand at 65.7% above last year's level, but still are 2% below the five-year average for the week ending on May 8. After the EIA report, the natural gas futures market proceeded to shake off the injections and rally, surpassing the $3 per mmbtu level for the first time since late February. Market expectations were for an injection of 117 billion cubic feet so the lower injection spurred buying.
One of the most interesting technical metrics, open interest, could provide an important clue as to future price action. Open interest is the total number of open but not closed long and short positions in NYMEX natural gas futures contracts. Open interest has been steady at around 1 million contracts since April but it recently started to rise, moving to 1.039 million contracts as of Friday, May 15. At these higher prices, it is likely that short sellers have once again commenced selling in hopes of a future market decline. These short sellers, who are fundamental bears, point to copious reserves of low cost natural gas in the U.S. and rising inventories. A gap on the charts and the illogical nature of this market could mean that shorts in this market could wind up on a skewer in the weeks and months ahead.
When it comes to natural gas, this combustible commodity from time to time has explosive price moves. While sentiment in natural gas continues to be bearish, the combustible commodity actually has a lot going for it these days. Unseasonably warm temperatures this spring and forecasts for a continuation of warmer weather across central and eastern parts of the United States during the second half of May are supportive of natural gas prices. The demand for cooling will increase natural gas usage from natural gas powered electric power plants.
Lower rig counts will also decrease natural gas production in the months ahead as the Baker Hughes rig count declined by another eight units this week. The number of rigs is now 60% lower than the highs seen last November. Finally, hurricane season is about to commence in the United States. We have not had a major storm in years and the geographic location of the delivery point for NYMEX natural gas, Henry Hub in Erath, Louisiana is dangerously close to the Gulf of Mexico. Violent storms in 2005 and 2008 took prices north of $10 per mmbtu. Therefore, although there are huge reserves of natural gas in the United States, the many issues now facing this market means anything is possible. At the same time, a price of $3 per mmbtu, on a long-term historical basis, is far from expensive.
When it comes to natural gas, those of us who have been trading the volatile commodity for years know that it is always wise to expect the unexpected. Natural gas is a very volatile commodity. Weekly historical volatility at 41.6% is nothing for a commodity that can trade at volatility levels in excess of 100% when it gets going. Although it is very hard to get excited about the price of natural gas after a long period of selling and lower prices, the fundamentals and technicals could be lining up for a powerful rally this summer. Keep your eyes on the weather as well as those gaps on the daily and weekly charts. While it may be tempting to sell rallies in natural gas in coming weeks, it is possible that those who do will fuel the next rally, as they may have to cover shorts on price spikes. Natural gas has a way of making those who get it wrong pay and pay dearly for their mistakes. If the weather this summer creates some big storms, watch out for the upside. The price of this commodity can only go $3 lower, but it can more than double given the right set of circumstances.
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