Natural Gas Prices Fall as Bears Pile on the Trade
Natural Gas Prices Fall as Bears Pile on the Trade
Natural Gas Outlook: Are Bears too Confident in More Downside?
- Natural gas futures (/NGF4) fall to fresh monthly lows.
- U.S. and European inventory levels encourage bears.
- Large short positioning exposes prices to potential squeeze.
Natural gas futures (/NGF4) fell nearly 1%, or 0.025 per one million British thermal units (mmBtu), to trade at 2.993 mmBtu Tuesday afternoon. The drop comes despite a colder weather outlook in the U.S. weather outlook, having added heating days over the next several weeks.
Inventory levels keep prices low even as weather gets colder
One reason the shift in weather forecasting isn’t causing prices to go higher, which would usually be the case at this time of year, is that U.S. inventory levels are sitting at healthy levels.
According to the Energy Information Administration (EIA), inventory rose 60 billion cubic feet (Bcf) from the prior week, bringing total inventory to 3,833 Bcf for November 10. That puts inventory at 203 Bcf above the EIA’s five-year average (3,630 Bcf).
European inventory levels are also sitting pretty. That is especially impressive given Europe has been largely cut off from Russian gas through this season’s injection period. A warmer-than-average October and November across much of the continent helped bolster storage levels to nearly 100%, which is well above the average of around 90% for this time of year.
Don’t count out the bulls just yet
While inventory levels are in the U.S. and Europe, that doesn’t necessarily mean prices will continue to fall. Since late October, prices have fallen over 20%, marking an official bear market for the commodity.
The fundamentals have indeed been bearish, but that has also led to an outsized short position among speculators, who are grouped together as non-commercial traders in the Commitments of Traders (COT) report. That report, released Friday, showed another 54,867 contracts added on the short side, bringing the total to 379,533, the largest position since June.
That leaves prices susceptible to a short squeeze if any event sparks a reversal in the prevailing bearish sentiment. Something like an unexpected outage at a key gas field or liquified natural gas (LNG) export facility could trigger such an event, and they do happen from time to time. That said, traders should be cautious if they trade the product to the downside.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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