Since Natural Gas futures made a multi-year low in March 2016 at 1.611, we have seen a strong rally to 2.786 (as of June 23, 2016). Weather has played a big role during the rally. The breakdown to the multi-year low was the result of warmer temperatures during the winter which led to less use of Natural Gas for heating homes and businesses. The rising prices we have seen since March have been the result of varying temperatures throughout the country that caused more Natural Gas usage during what is typically a storage building time period. We also saw less production of Natural Gas because the lower prices caused a large reduction in rig counts. The Natural Gas rig count has fallen from a peak 1,606 rigs in September, 2008 to 86 rigs as of June 10, 2016. The combination of weather and lower production has trimmed the surplus in Natural Gas supplies. At the end of March current Natural Gas inventories were 53% higher than the 5 year average. The current inventory surplus has narrowed to only 28% above the 5 year average.
Our expectation of a hot summer could lead to excessive demand for Natural Gas from the electric power stations as the use of air conditioners increase. With the reduction in the use of coal in the power industry which has resulted in massive layoffs of miners and the inability to ramp up coal production could cause a drawdown in natural gas supply, in my opinion. This scenario could put more pressure on current inventory versus the 5 year average. If current inventories move below the 5 year average and if we get the colder winter expected as a result of the expected La Nina weather pattern, we could see higher Natural Gas prices for the upcoming winter.
At the time of this article, Natural Gas Futures are trading above the 21 month MA which is at 2.6190. If June closes above this level we could see continued higher prices. The next area of resistance will be in the 3.104 to 3.299 range. Breaking out above these levels could lead to a run to resistance up at 3.558. A trade idea for the summer would be to buy the September 3.10 – 3.40 call spread at approximately $360 plus commissions and fees. A trade idea to look at for the end of the year would be to buy the January 4.10 – 5.00 call ratio spread. You purchase 1 Jan 4.10 call and sell 2 Jan 5.00 calls for approximately $260 plus commissions and fees.
For those interested, I hold a weekly livestock webinar on Friday, June 24, at 2:30pm. It is free for anyone who wants to sign up and the link for sign up is below. If you cannot attend live, a recording will be sent to your email upon signup.
