December 5, 2014
As posted on CQG.
In the days leading up to winter, we have seen some cold and frigid conditions. On November 1, less than one percent of the US had snow cover. Two weeks later 50% of the US had snow and an arctic blast swept across two-thirds of the country. Demand for heating fuel soared as did natural gas prices. On October 28, the price of active month natural gas futures traded down to $3.541 per mmbtu. By November 10, the price was $4.544 – over $1, or more than 28%, higher in less than two weeks.
As of November 21, inventories stood at 3.432 trillion cubic feet – 9.2% below last year’s level and 10.4% below the five-year average for stockpiles on that date. The forecast warmed up a bit, causing natural gas futures to fall. Prices plummeted with active month January futures trading back down below $3.80. We have already seen incredible volatility in natural gas futures and the winter has not even begun.
Daily historical volatility in natural gas has moved from 17.31% on October 27 to almost 52%. Natural gas futures have reflected changes in the weather.
Increased volatility based on changing weather conditions has made this market a wild ride in November. This frantic price action has resulted in a number of gaps on the daily natural gas chart. In futures markets, subsequent trading action tends to fill gaps on charts. There is currently a gap on the daily chart in January natural gas futures above the market between $4.041 and $4.079. Volume picked up in November, but open interest has been static at just under the one-million-contract mark.
The action so far during the days leading up to winter is encouraging for natural gas traders. Traders thrive on volatility. Wider daily trading ranges offer the opportunity for risk positions.
Fundamentals currently support a continuation of volatility in natural gas this winter. We still have three months to go and inventory levels are low when compared to levels over the past eleven years. In fact, as of this date and since 2004, we have witnessed four years where inventory levels were lower than they currently are at this time of year. During those years, the lowest high for natural gas in the post September through March period was $8.32 per mmbtu. I am not saying that natural gas prices will exceed this level during the coming winter. However, the current price dip could be an opportunity based not only on technical factors but also on fundamentals, namely the current level of inventories.
The Bottom Line
Winter has not even begun and natural gas volatility has skyrocketed. Gaps on daily charts, low inventories, and the prospects for a winter with cold snaps will cause natural gas volatility to continue. The current price dip offers a great opportunity for nimble traders to take advantage of action in the natural gas futures market over coming months. Natural gas can move like a psychotic horse galloping through a burning barn. Watch the weather forecasts, remember to use tight stops, and do not forget to take profits when the market goes your way.
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