12/04-2018: February Natural Gas: Storage Levels Vs. Degree Days

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

01     02
4     5


Natural gas can be treacherous for commodity traders, even with the mini contract. It can go along for years in a rather narrow trading range in its quiescent state, and then suddenly without warning exhibit violent volatility, such as what has happened recently. Commodity traders caught without adequate safety measures such as use of option spreads, can see their losses accelerate to unlimited. The reason for the recent explosion in natural gas prices is not entirely clear. We have the effects of global warming reducing demand for quite a long time. We have vastly increased production over the 1970's when there was a shortage, due to exploitation of shale gas and fracking technologies in this country. We have something called "contango" going on where the futures price is above the expected spot price. Most analysts predict this short squeeze activity cannot last and natural gas futures will have to correct in the near future. The futures are reacting mainly to a reduced amount of natural gas in storage but production is at near to a record high.

Because of an extremely strong chart pattern, we had to double-weight our interpretation of the news in order to break a tie in the Decision Matrix at the end of this article.
Note in calendar spread the April futures contract price is much lower than the February price.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

February Natural Gas:

Parabolic Chart

Nirvana Chart

February Natural Gas:

Initial Chart

News Analysis

The natural gas market recently surged even as crude oil prices were coming down. After that, choppy action in a $1 range scared off buyers. It has the largest speculator and fund net long position since May, 2017. Inventory levels are running under a year ago and also below five year average levels, indicating solid winter demand aboive normal. The weekly natural gas rig count fell to 189 rigs, down five in the latest reading. Below normal temperatures in forecasts are restricted to the upper Midwest, and reaching briefly into the Soiuthwest. The natural gas futures market appears to be overbought.

With storage levels projected to remain low into the end of December, a bullish January outlook could send prices toi $6/MMBtu. But the near-term outlook shows warmer than normal weather for the middle of December possibly lasting into the end of the month. For longer term balances, Lower 48 production continues to surprise to the uplside.

In the natural gas market, heating degree days (HHD's) are critical. The weather outlook shows HDD's to be materiallyi below the 10-year and 30-year norms. Currently HHD's are so far under the normal nationwide as to leave the likelihood of a near-term price weakness as a high probability. The main bullish factor is a massive deficit in natural gas storage relative to the 5-year average. A 700+ Bcf deficit may persist despite the warmer-than-normal weather outlook.

A "freight train" of supply growth continues despite the storage deficit. The high productiojn should keep natural gas contracts depressed relative to the winter months, because traders will see the current gas production and extrapolate where storage will end by November, 2019. 3.6 Tcf looks like a very probable level for Nov., 2019, despite very low storage level projejctions for April, 2019.

Over 200 customers were without natural gas in East Chicago after a natural gas leak. Fifteen families were evacuated. The gas comany was NiSource, and the leak has beenr repaired.

Qatar said it will leave OPEC and focus on the production of natural gas. Saudi Arabia is one of Qatar's regional rivals and Qatar wanted independence from the organization domionated by Saudi Arabia. Qatar is the world's largest exporter of liquified natural gas. In June, 2017, Saudi Arabia imposed a travel ban on Qatar, accusing it of financing terrorism and interferring in the internal affairs of other states. Qatar has doubled down on its reliance with ties to Turkey and other political Islamists throughout the world. It is increasing its coordination iwth Iran. At 600,000 barrels per day, Qatar contributes only 2% of OPEC's total output. Consumption of natural gas has been growing faster than that of crude oil. Qatar works in partnership with Exxon and Shell. Competing exporters of liquified natural gas include Russia, Australia, and the U.S.

Natural gas customers in British Columbia were asked reduce consumption after a pipeline explosion. A $40 billion natural gas pipeline in Nothern British Columbia just got the "go-ahead."

One analyst described OPEC as now only a two-member organization for all practical purposes, Russia and Saudi Arabia. In effect, this analyst said it really doesn't have impact anyi more.

Recent natural gas spot prices increased lately in all areas except Henry Hub which is the basis location for the NG commodities contract.

Natural gas imports in Mexico are hitting highs as the government there changes hands. Exports to Mexico surged toi abovve 5 Bcf/day for the first time ever.

Warming trends are finally catching traders' attention causing January Natural Gas futures to plunge a bit.

Recent hurricanes causing a million people to lose power at one time or another reduced electricity demand and hence also demand for natural gas to burn in steam plants. Despite that, prices surged afterward. Heavy rain in Appalachia was supposed to reduce output from there. It supplies 37% of all U.S. natural gas. U.S. production still remains in record high ranges.

The natural gas market has been taking in that we will start this winter with the least amount of gas in underground storage since 2003, five years before the shale revolution took flight. But when heating days are considered, the reality is that our winters have been getting less severe. This trend has been down 25% since the 1950's indicating that global warming is a reality.

A number of LNG export projects will be coming on line soon. LNG exports are the largest natural gas incremental demand market. Companies ramping up LNG facilities include Kinder Morgan and Cheniere.

Point & Figure Chart

 86.0I                                                                  R 12/ 3
     I NYME- Feb-19 Natural Gas Mini 2.5KmmBTU .c/ Cm.=0.01  Lim.= 0.1
     I   X
     I   XO        X
     I   XO    X   XO
     I X XO    XO  XO
     IOX  O     O  XOXOXOXO
     IO         O  XOXOXOXO
     I          OX XOXOXO O
     I          OX XOX    O
     I          O  XO     O
     I            O       O
     I                    O
     I                    O
     I                    O
     I                    O
     I                    O
     I                    O
     I                    O
     I                    O
     I                    OX
     I                    OXO
     I                    OXO
     I                    O O              X
     I                      OX         X   XO
     I                      OXO        XOX XO        XOX X
     I                      OXO        XOXOXO        XOXOXOX
     I                      OXOX   X   XOXOXOX       XOXOXOXO
     I                      OXOXO  XOX XOXOXOXO      XOXOXOXO
     I                      OXO O  XOXOXOX  O OX     XOX  OX
     I                      OX  O  XO OXOX    OXO    XOX  O
     I                      OX  O  X  O OX    OXO    XO
     I                      OX  O  X    OX    OXO    X
     I                      O   OXOX    OX    OXOX   X
     I                          OXOX    O     O OXO  X
     I                          OXO             OXO  X
     I                          OX              O OX X
     I                          O                 OXOX
     I                                            OXOX
     I                                            OXOX
     I                                            O O
                           111          1111      11 11111111
Our computer tells us a non-conventional reactive approach works best for natural gas on p&f charts. Therefore the above chart is taken as giving a buy signal.
Note that on commodities like this one, our p&f charts include the effect of rolling forward contracts to reflect what a long-term position trader would actually see, but distant past historic prices do not mach actual for that reason. We think this method gives a better predictor of futures prices.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Thrust ". It is giving a sell signal.

Internal Printout 1

Results of "Thrust" for Natural Gas (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $2,500. Initial margin on a single contract is $1,568 for the mini contract. Use of options is advised.

Historic Range

Scale trade buyers are entering the market for the long term in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are starting to get increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Natural Gas April 6 Call @ 0.008 and Buy (1) Natural Gas April 2.5 Put @ 0.054
(Exchange quotes would be 6000 call @ 8 and 2500 put @ 54)

o 1 o 2 o 5

o 3

o 4

Calendar Spread

What the Feb. - Apr. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at +4.70 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +8.00 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at the buy the far, sell the near point.

Level Table:

Level Table

The path of least resistance is down.
 50.0|                                                                  R 12/ 3
 NYME- Feb-19 Natural Gas Mini 2.5KmmBTU .c/ Cm.=0.01  Lim.= 0.1
     |YZZZZZZ[   <<<
 22.5|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.138
       1 1                                       1 1 1 1 1           1
       2 2 1 1 2 2 3 3 4 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 1           2
       0 1 0 1 0 1 0 1 0 1 3 1 2 1 2 1 2 0 2 0 2 0 1 0 1 3           0
       5 8 3 8 1 5 2 6 2 6 0 4 9 2 6 1 5 8 2 6 0 4 8 1 5 0           3

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 12/3 ).

Intraday Chart

                 Risk Versus Opportunity Report

                  NGG9    February Natural Gas

                      High Price:  5.131
                   Current Price:  4.157
                       Low Price:  1.980

                            Risk: -0.548
                     Opportunity: -1.225

                    (O/R) Ratio =  2.235

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 2
Point & Figure + 1
Cyclicals + 1
Seasonals + 1
Internal System 1 - 1
Internal System 2 0
Third System - 1
Historic Range + 1
Commitment of Traders - 1
Range/Volatility + 1
Level Table - 1
Other Factors + 1
Total - 1
Place 9 February Natural Gas on a Sell Watch with stoploss @ +1.39 above the get-in point when recent price is represented as "41.47".