Will Warm Weather Heat up Natural Gas Futures?
Fundamentals
Traders’ interest in the nature gas futures market is starting to heat up, as most of the U.S. is experiencing hotter than normal temperatures as we enter the heart of summer. Warm weather usually triggers increased Natural Gas usage by utilities for the generation of electricity used for air conditioning. This past Thursday’s release of the weekly Energy Information Administration’s gas storage report showed that U.S. gas injections into storage totaled 78 billion cubic feet (bcf), which was 10 bcf below last year’s total and 11 bcf below the 5-year average for this time of year. Despite the lower than average storage build, U.S. gas in storage totals 2.84 trillion cubic feet (tcf,) or nearly 11% above the 5-year average. Long-term weather forecasts are calling for above normal temperatures during the next 3 months in the eastern half of the U.S., with The National Oceanic and Atmospheric Administration (NOAA) forecasting warmer than normal temperatures in the Northeast and throughout the Great Lakes region -- mostly due to the development of a La Nina weather condition. These are some of the highest Natural Gas usage areas of the country for the generation of electricity, which if forecasts hold true, could send Natural Gas demand upward. As the calendar moves into August and September, many energy traders will turn their focus towards the Gulf of Mexico when we move into the heart of the Atlantic hurricane season. Any forecast of a severe storm reaching the oil and gas producing regions of the Gulf can spur a rally in Natural Gas futures, as traders become concerned of possible disruptions in production should the oil and gas rigs suffer major storm damage. Although industrial demand for Natural Gas still remains lackluster due to the slow pace of the economic recovery, potential production disruptions due to the weather could introduce increased volatility in the short-term into the Natural Gas market, as both bulls and bears digest long and short-term fundamentals that may be direct opposites in determining the near-term direction of the Natural Gas futures market.
Trading Ideas
The longer-term trend for Natural Gas prices continues to favor the bears, as increased production and slow growth in industrial production have resulted in U.S. gas storage levels that are more than ample. However, the Natural Gas market has a reputation of becoming volatile should a hurricane strike the production areas of the Gulf of Mexico. Traders who are long-term bearish towards Natural Gas prices but who wish to have some protection against a huge move higher should a major storm shut-down production could explore trading strategies using Natural Gas futures options. An example of such a strategy would be selling an out-of-the-money call option and also buying multiple further out-of-the-money call options, with the entire trade being done for a net-credit. An example of such a trade would be selling an October Natural Gas 5.000 call and buying 2 October Natural Gas 6.100 calls. With October Natural Gas trading at 4.575 as of this writing, this spread could be sold for about a 0.100 credit, or $1,000, not including commissions. A trader initiating this spread would want to see October Natural Gas trading below 5.000 or above 7.100 at option expiration in September.
Technicals
Looking at the daily chart for September Natural Gas, we notice prices trading in a downward channel since the recent highs were made back in late June. The late June rally was stopped in its traces, as prices failed to penetrate the 200-day moving average, which many traders view as they attempt to determinate whether a market is bullish or bearish. Last week’s rally attempt also failed to take out the 20-day moving average and prevented follow-through buying from short-term momentum traders. The 14-day RSI is neutral, with a current reading of 46.02. Support is seen at last week’s lows of 4.290, with resistance found at the 20-day moving average currently near the 4.680 area.
Mike Zarembski, Senior Commodity Analyst
