Natural gas futures were trading at just over the $2.50 per MMBtu level on Monday, April 5. The peak season for demand ended in March. We're now at the start of the 2021 injection season when natural gas flows into storage in the US.
In June 2020, natural gas prices reached the lowest level in a quarter of a century at $1.432 per MMBtu. Falling demand because of the global pandemic that sent crude oil prices below zero on the nearby NYMEX WTI futures contract and to the lowest price of this century on Brent futures weighed on natural gas. In March 2020, nearby natural gas futures traded in a range from $1.519 to $1.998 per MMBtu. In March 2021, optimism over the end of COVID-19 and other factors lifted the range to $2.422 to $2.887 per MMBtu.
The odds of a decline below the $2 level over the coming offseason months are low. While there are massive US reserves of natural gas in the Marcellus and Utica shale regions, the regulatory environment for extracting them from the earth’s crust via fracking is dramatically changing. We should expect higher lows in the natural gas futures market compared to last year. Buying the energy commodity on dips could be the optimal approach during the coming months. The ProShares Ultra Bloomberg Natural Gas product (NYSEARCA:BOIL) is a short-term trading tool for those who do not venture into the highly volatile natural gas futures market on NYMEX.
The end of the withdrawal season with 1.75 trillion cubic feet in storage
The final withdrawal from US natural gas storage came during the week ending on March 19. Natural gas inventories fell to a low of 1.75 trillion cubic feet, roughly 13% below the previous year and over 4% under the five-year average for the end of the withdrawal season. At 1.75 tcf, stocks found a bottom 236 billion cubic feet below the 2020 low.
As the chart highlights, natural gas began flowing into storage with the first injection of the 2021 season during the week ending on March 26. Inventories stood at 1.764 tcf, 11.3% below the previous year and 2.0% below the five-year average for the end of March.
At the end of 2021’s first quarter, the nearby NYMEX natural gas futures posted a 2.72% gain compared to the closing price on Dec. 31, 2020.
Natural gas had been trending higher since mid March
The daily chart of May futures illustrates the decline over the recent trading sessions. It's not unusual for natural gas prices to slip as the market enters the offseason for demand in early April.
Open interest, the total number of open long and short positions in the natural gas futures market, has been steady at the 1.2 million contract level throughout March. The slow stochastic, a price momentum indicator, turned lower from just above neutral territory with the move to the downside on April 5. Relative strength also turned lower after sitting at a neutral reading. Daily historical volatility moved higher to over 29.5% on April 5 as the market fell in a 12.8 cents range and closed near the bottom end of the trading band.
Technical support on May futures stands at the March 18 $2.459 and the late December $2.352 per MMBtu lows.
The continuous contract shows that a decline below $2.422 would end the pattern of higher lows that has been in place since the June 2020, $1.432 per MMBtu bottom.
Warren Buffett bets on no challenge of the June 2020 low
Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) made a substantial investment in natural gas’ futures when the price reached a twenty-five-year low last June. The value investor paid $10 billion to acquire Dominion Energy’s (D) transmission and pipeline infrastructure for $4 billion in cash and $6 billion in assumed debt. The deal expanded Berkshire’s control of interstate natural gas transmission from 8% to 18% in the United States.
The deal was announced right after nearby natural gas futures traded to the $1.432 per MMBtu low. Mr. Buffett made a wager that last year’s bottom would stand as the energy commodity’s lowest price for the foreseeable future, which looks like an excellent bet.
Three reasons why higher lows are on the horizon
Three compelling factors support the natural gas market as we head into the 2021 offseason for the energy commodity:
- The shift in US energy policy means that the regulatory environment will tighten when it comes to fracking for natural gas and crude oil. As the Biden administration addresses climate change by inhibiting fossil fuel production and encouraging alternative clean energy sources, output is likely to decline. According to Baker Hughes, on April 2, 91 natural gas rigs were operating compared to 100 at the same time in 2020. Lower production will weigh on injections over the coming months.
- The global demand for LNG continues to rise. The US is a significant supplier of liquefied natural gas worldwide. US suppliers are likely to continue to ship natural gas to regions where the price is higher, putting upward pressure on domestic prices by limiting the flow into storage.
- The low in June 2020 could turn out to be an aberration as energy demand evaporated during last year’s global pandemic. As vaccines go into arms, a return to normalcy over the coming weeks and months will increase natural gas demand. The Fed expects 6.5% GDP growth in 2021, which should cause energy demand to climb, putting upward pressure on prices when the regulatory environment puts downward pressure on supplies.
We are likely to see higher lows in the natural gas futures arena. A decline below the $2 per MMBtu level seems unlikely in 2021.
BOIL on dips
I'm a buyer of natural gas on price dips. The volatile energy commodity tends to move lower than most analysts believe during bearish periods and higher during price recoveries and bull markets. We are now in the offseason for demand. However, rising power demands for air conditioning during the summer months, the potential of storms in the Gulf of Mexico that could impact pipeline and production infrastructure throughout the summer months, and growing LNG export requirements are likely to support the natural gas future price.
A scale-down buying approach during bearish periods could yield optimal results over the coming weeks and months. The most direct route for a risk position in natural gas is via the futures and futures options on the CME’s NYMEX contracts. For those looking at participating in the volatile natural gas market without venturing into the futures arena, the ProShares Ultra Bloomberg Natural Gas product (BOIL) is a short-term tool that provides an alternative and leverage. The most recent top holdings and fund summary for BOIL include:
Source: Yahoo Finance
The holdings are outdated as the March contract expired. BOIL likely holds May and June futures as of April 5 to create leverage.
BOIL has $76.062 million under management, trades an average of over 1.16 million shares each day, and charges a 0.95% management fee.
Over roughly the same period, BOIL rose from $18.98 to $22.16 per share or 16.75%. BOIL fell short of its twice leveraged percentage goal as futures rolled from April to May contracts and because the product only trades during hours when the US stock market is operating. Natural gas futures trade around the clock from Sunday evening in the US until late Friday. Highs or lows in the natural gas market that occur outside of stock market hours are not reflected in the BOIL product’s price.
At the start of the 2021 injection season, the natural gas market looks set to make higher lows. I doubt we will see the price of nearby futures below the $2 per MMBtu level. If we do, it will likely create a golden buying opportunity.
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