Natural Gas: Bottom In?
Last week may have been the turning point in the natural gas market…
As you may know, this commodity suffered a heavy downturn in June and July. Relatively cool temperatures across key usage regions had cooling demand much lower than seasonal norms.
As a result, natural gas producers were able to pile large quantities of gas into storage. Not surprisingly, investors reacted by sending the commodity spiraling lower.
But something strange happened last week…
In spite of relatively cool weather across the East Coast, there was less gas added to storage than expected. In fact, the EIA reported an 88 billion cubic foot build for the week of July 25th.
While the build was still larger than the 5-year average build of 43 bcf, it was much lower than analysts’ expectations. The inventory miss sent natural gas soaring higher by 2.5% at one point in last Thursday’s session.
Now the question everyone’s asking is…
…will the rally hold?
For answers, let’s look to the EIA inventory chart…
As you can see, current inventories (blue line) are still well below normal levels. In fact, working gas in storage is 18.7% below last year and 21.7% below the 5-year average (gray shaded area).
What’s that mean in plain English?
Producers still have a lot of ground to make up by the official start of the heating season on November 1st. In fact, the EIA’s Short-Term Energy Outlook still expects a storage shortfall of around 380 bcf.
Of course, Mother Nature will play a key role in the future direction of natural gas…
The only things bears have going for them is the fact temperatures are expected to be below normal for the next 8-14 days. Notice the large vortex of cool air hovering over the Central and Eastern US.
In order for natural gas to really gain ground in coming weeks, we’ll need to see temperatures warm up considerably.
How do you capitalize on this information?
Given last week’s very bullish reaction to the EIA inventory report, natural gas is likely putting in a bottom. Not only is the commodity drastically oversold, but it has a strong seasonal tendency of rising in September and October.
As a result, investors may want to initiate a position in the US Natural Gas Fund (UNG) or US 12-month Natural Gas Fund (UNL).
Until Next Time,
Justin Bennett
***Disclosure*** Justin Bennett is long UNG calls.
Category: Commodities
