There are two deeply conflicting sides of the natural gas trade heading into late summer. On one hand, we’re coming off a record setting El Nino that is translating into a La Nina late summer/fall weather pattern. The post El Nino, La Nina weather pattern is already bringing the expected heat that comes with it but speculators want more. They want more heat and they want the hurricane season to be an active one. These are the two bullish components of a fundamentally weak natural gas market. Natural gas producers are selling forward production at their fastest rate since the fall of 2013. The question here becomes a bit more ambiguous as producer selling can have as much to do with selling forward supplies to raise cash as it can the their expectation of current market prices versus forward prices. We’ll look at weather patterns, seasonality and the commercial trader vs speculator balance in the market to determine a proper course of action heading into this market’s critical seasonal period.
The late summer weather is a major variable in the natural gas market as North America heats up and more electricity is generated by natural gas to power the air conditioners. This year seems to be making up for lost time since El Nino played its predicted part in a long cool, spring. The National Oceanic and Atmospheric Administration (NOAA) has officially declared this record setting El Nino event, over. This is important as we are currently at the seasonal peak for natural gas and we’ll show that we believe natural gas prices will soften in the near term. However, the transition from El Nino to La Nina will be in full effect this fall and we’ll discuss the trouble that has come with it in the past.
We began this week with a big picture look at the natural gas market for TraderPlanet. Combining fundamental, technical and seasonal analysis, we suggest that this market will stay soft in, “Natural Gas: $2.50 Here We Come.”
Tuesday, we moved to the soybean market in our piece for Equities.com. We looked at the considerable commercial buying as this market has declined and noted that, as this decline has stalled, a good case could be made for a, “Soybean Short Trap.” July soybeans are $.20 higher since publication.
Finally, our primary focus was an update on last week’s inflation topic. This week, we examine entry level wage inflation and the competition between government subsidy programs and employers in, “What Inflation? – Addendum.” For what it’s worth, this piece is also traveling around the internet under the title of simply, “Entry Level Wage Inflation.”
We published, “Picking a Bottom in Natural Gas” on January 15th. The recent decoupling of the declining energy sector from the broader stock market is nurturing the seeds of future growth in the economy as a whole. This is providing early buyers in natural gas futures with some hope that as the energy and stock markets have decoupled so too will natural gas from the broader energy sector.
Monday began with an official COT Sell signal in the U.S. Dollar Index that we published in TraderPlanet. This trade was actually a follow up to the previous week’s piece also published in TraderPlanet.
We combined these into one post including the annotated US Dollar Index chart in – The USD Index – A Speculative Bull Trap?
The natural gas futures market was trading above $5 per mm/btu one year ago. This was boosted in large part by one of the coldest winters on record. Frankly, the news in natural gas since then has been nothing but bad as a mild summer limited cooling demands and the still temperate winter has brought more of the same. Furthermore, the sharp drop in oil prices along with a growing supply glut have also combined to send prices to multi-year lows. Several bearish factors have beaten the market down 50% from last year’s high. In fact, the gravity of the market has finally forced it to fall below the technical support on the chart below that had built up since the market last bottomed in 2012. However, all is not lost.
The recent bout of record breaking low temperatures has led to an obvious increase in the demand for natural gas and pushed delivery prices up to $4.40 per million metric British thermal units (mmbtu). These are the highest prices we’ve seen since the heat wave and drought from the summer of 2011. In fact, the Energy Information Administration reported the largest natural gas draw for the week of December 13th since they began tracking it in 1994. Furthermore, many analysts expect to break this record yet again with this week’s report. However, in spite of the recent strength in the market, I believe that there are several structural reasons why this rally won’t last and that the pricing of forward natural gas will head lower from here.