Natural gas had been on a one-way path lower from November 2019 through June 2020. The price of the continuous contract on NYMEX fell from $2.905 to the lowest level since 1995, at $1.432 per MMBtu. The high last November was a lower high than in late 2018, when natural gas rose to $4.929 on the back of low inventories going into the peak season winter months.

We are now at a time of the year when natural gas prepares for the winter season. In the lead-up to the 2019/2020 winter, the amount of natural gas in storage across the US rose to a high of 3.732 trillion cubic feet. The high level of stocks caused the energy commodity to remain below the $3 per MMBtu level seen last November. This year, we are heading into the coldest months with even more natural gas in storage.

The most direct route for a risk position in natural gas is via the futures and futures options that trade on the NYMEX division of the CME. The ProShares Ultra Bloomberg Natural Gas (BOIL) and its bearish counterpart the ProShares UltraShort Bloomberg Natural Gas (KOLD) strive to offer a double leveraged return compared to the futures market’s price action on the up and downside.

The latest stockpile data pushes the amount of gas in storage above the 2019 peak

On Thursday, October 1, the Energy Information Administration told the natural gas market that inventories rose by 76 billion cubic feet for the week ending on September 25.

Source: CQG

The injection put stockpiles in storage across the United States at 3.756 trillion cubic feet. Stocks climbed above the 2019 peak when they reached 3.732 tcf at the end of the injection season in November.

Inventories were 14.3% above last year’s level and 12.1% over the five-year average for the end of September. While the percentage is above last year’s level, the week ending on September 25 marked the twenty-sixth consecutive week that the percentage declined from the previous week.

Four trillion cubic feet is the next stop

Now that natural gas inventories have surpassed last year’s peak, the next target is the 4 tcf level. With approximately seven weeks to go before the start of the 2020/2021 withdrawal season, an average injection of 34.9 bcf would push stockpiles above the level for the third time since the EIA began reporting inventories.

The bottom line is that there is more than enough natural gas in storage across the United States to meet demand during the winter months, even if the weather is colder than the average. Last year’s stockpiles weighed on the price of natural gas. An even higher level this year could cap the potential for rallies over the coming weeks and months.

Natural gas stocks went into the 2018/2019 winter season with 3.234 tcf in storage. The low level of stocks helped send the price to a high of $4.929 per MMBtu in November 2018. The potential for a rise to even the $3 level on the nearby futures contract is questionable, even though the January 2021 contract is trading well above that level on October 1.

October futures roll to November. Seasonality created the contango that is shrinking after the roll period.

The October natural gas futures market rolled to November at around a sixty cents contango. The steep level of the premium for deferred delivery was a function of the switch from injections to withdrawals that begins in November. However, the price of November futures began to decline during and after the roll, with the contract trading on either side of the $2.50 level on the first trading session in October.

Source: CQG

As the daily chart of November futures illustrates, we have seen lower highs since early September. On September 4, the November contract traded to a high of $3.002 per MMBtu. After a correction to $2.496 on September 17, the price made a lower high at $2.928 on September 24. This week, natural gas fell to a lower low of $2.425 on September 30 and was trading around the $2.50 level on October 1. The pattern of lower highs and lower lows could be a function of the high level of inventories. As the stockpiles approach the 4 tcf level, we will likely see more selling pressure in the natural gas futures market.

Open interest at 1.271 million contract level is higher than last year at this time, when it stood at 1.148 million contracts on September 30. The recent price volatility likely encouraged an increase in speculative risk position. Additionally, the rally to over the $3 level on the January 2021 futures contract could encourage producer hedging.

Source: CQG

The chart of the January 2021 natural gas futures contract shows that the price was sitting at over $3.17 per MMBtu on October 1. The January contract put in a bearish reversal on the first day of Q4. The contract reached a high of $3.479 on September 24. The 75 cents premium for natural gas for January delivery compared to November delivery is a function of seasonality. It also reflects the uncertainty of the future of US energy policy after the November 3 election. Among many things, the election is a referendum on the future of US energy production. A sweeping victory by Democrats would likely lead to more regulation and less production. If the incumbent President is reelected and the Senate remains in the hands of Republicans, the status quo would probably keep production flowing.

Given the high level of stocks, we should see the contango between November and January futures decline. The election adds another dimension that could cause lots of volatility in the spread.

Levels to watch in November natural gas futures

There is a wide range of potential volatility in the natural gas market over the coming weeks, which is good news for traders.

Source: CQG

The daily chart of November future shows that technical resistance stands at $2.928 and $3.002 per MMBtu. Support is at $2.404, $2.253, and $2.133 per MMBtu. At the $2.50 level on October 1, the energy commodity is approaching the first technical support level.

On the continuous contracts, longer-term resistance is at the November 2019 high of $2.905. Support is at $2, $1.605, and the June 2020 twenty-five-year low at $1.432 per MMBtu.

The upcoming withdrawal season and rising natural gas requirements during the winter months should create an environment for a higher low when it comes to the continuous futures contract. I do not expect the November futures to trade below $2 per MMBtu. However, the $2.905 level could be a cap on the upside as stocks approach record level. I would suggest a scale-down buying approach as the price works lower. I would take profits on a scale-up basis to the high $2.80s on November futures.

BOIL and KOLD for trading. UNG on any significant dip in October.

The most direct route for a risk position in the natural gas market is via the futures and futures options that trade on the NYMEX division of the CME. For those who wish to participate in the market without venturing into the futures arena, BOIL and KOLD provide an alternative. These products are only appropriate for a short-term long and short position, as the price for their double leverage is time decay.

The fund summary for KOLD states:

Source: Yahoo Finance

KOLD has net assets of $25.19 million, trades an average of 843,023 shares each day, and charges a 1.54% expense ratio. BOIL operates inversely to the KOLD product. The price of November futures fell from $2.928 on September 24 to the most recent low of $2.425 on September 30, a decline of 17.2%.

Source: Barchart

Over the same period, KOLD rose from $29.19 to $40.89 per share, or 40%. The product delivered a little over double the percentage move in the November futures contract.

The high level of stockpiles in the natural gas market could keep the pressure on the price of the energy commodity. However, the November election has the potential to cause lots of volatility over the coming weeks.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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