Natural gas producers sold more than 28,000 contract’s worth of forward production last week. This is the most concerted forward production hedging we’ve seen since January of 2014 and has brought their net position to its most bearish level since July of that same year. We find this action alarming as the last time natural gas drillers sold this anxiously, prices were above $5 per million metric British thermal units (mmBtu). What does that behavior mean to prices starting at $2 per mmBtu?
Today’s trade doesn’t have a ton of text as the concept is very simple. Commercial traders, natural gas drillers have come out of the woodwork to get forward production sold at these prices. This can be seen in both the rapidity and size of their selling as the size of their total position has grown by 34% in the last month and now stands as their largest total position since March of 2014. Natural gas drillers’ sales of forward production is the finger on the pulse of the market. Their business models are very clear individually and very coercive, collectively. We feel the collective selling pressure will rebuke the market’s attempt to gain traction above the trend line that, dating back to September, has defined the recent decline.
The premise of both the mechanical and discretionary Cot signals programs follow the same three step process that is currently playing out in the natural gas futures. First, only look for trades in line with the commercial traders’ momentum. Second, wait for the short-term market momentum to run counter the commercials’ sufficiently to build up market tension. This is quantified by the short-term momentum trigger on the included chart. This is our timing mechanism. Finally, once the market turns and begins to move in the commercial traders’ predicted direction, we enter the market. You can see the interaction of these variables quantified in the generated trading signals.
The natural gas market’s biggest and most well informed traders are telling us unequivocally that they’d rather be sellers than buyers at these prices. Furthermore, the recent rise in prices has brought natural gas traders back to their trading terminals as they look to lock in any gains they can find in forward production. Regardless of what we think of the global economy’s growth or deflation, we’ll acquiesce to those far more, “in the know”…..the commercial traders.
