Rebound or Stagnation?
Fundamentals
Natural Gas futures have rebounded sharply, rising for the sixth time in seven trading sessions. Coincidentally, futures are now trading at levels last seen prior to the CFTC announcing that the United States Natural Gas Fund (UNG) will no longer have a position limit exemption on August 19th. The Fund being forced to unwind positions, in addition to weak fundamentals and opportunistic traders sensing a trading opportunity, has forced prices down to what may be seen as artificially low levels. It looks as though those traders riding the short wave down have now been forced out of the market themselves. Now, traders are left with the question of where Natural Gas prices are heading next. The low price levels have attracted value buyers to the market, but will they be Atlas supporting the Gas market on their shoulders? Probably not - at least by themselves.
Economic data released yesterday was better than expected across the board. Retail sales had a better than expected showing, as did the Empire Manufacturing Index. Also, the PPI numbers came in higher than anticipated, which can be seen as inflationary and a positive for commodities in general. Traders may be holding out hope that improved economic conditions will help work down the supply glut. Like Crude Oil earlier this year, analysts are beginning to show concern that the depressed price levels could result in lower Natural Gas production.
Bargain prices, green shoots and production concerns are all supportive of Natural Gas prices, but the market is not without downside risk. Current supplies of Gas are 17% above seasonal averages heading into the fall months. This summer has been extremely mild, and forecasters are expecting these weather conditions to spill over into winter. Even with trimmed production, a mild winter will make it much more difficult to work down the supply glut. The fundamental outlook remains murky, suggesting a tug of war may ensue, leading to sideways trading.
Trading Ideas
Given the neutral fundamental and technical outlooks, traders may wish to enter in to a neutral option spread position. One such strategy would entail entering a short strangle position. Some traders may wish to sell the October Natural Gas 2.50 put (NGV92.5P) and sell the October 4.50 call (NGV94.5C) for a credit of 0.045, or $450. The maximum profit on this spread is the initial credit, yet the trade has unlimited risk potential. It might possibly be advisable to exit the short strangle if the underlying contract price nears either of the strike prices.
Technicals
The October Natural Gas chart shows the market making great strides technically since reaching contract lows earlier this month. Prices have advanced beyond the 20-day moving average, suggesting a relative low may be in place. The market flirted with the 50-day moving average, which happens to coincide with the July 13th low of 3.584 and could offer resistance. If prices are able to cross this average, the October contract may face stout resistance near the 100-day moving average near the 4.00 mark. The short-term full stochastics are beginning to enter into overbought territory, suggesting the pace of the current rally may begin to lose steam.
Rob Kurzatkowski, Senior Commodity Analyst
