Natural Gas at Key Inflection Point

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Natural Gas closed above the pivotal $3.00 level to close last week, a price important for both psychological and technical reasons. On Friday, price accelerated higher, and gas closed the week up over 4%. Gas had broken above the 15 day and 200 day moving averages following Friday's rapid move, although some of those gains have since been returned on Monday.

It has been awhile since we have seen swings like this in gas markets, and traders looking to gain exposure to volatility in energy markets should study this commodity closely.


chart by Jason Pfaff in TradingView


Another close or two above that level to open this week should push prices of the commodity higher. The key drivers for an escalating price will be a warming weather pattern and tighter inventory levels than seasonal averages.

Hot air has descended on densely populated areas stretching from Chicago to New York City as the Northeast, Mid-Atlantic and Great Lakes regions are all sweltering and summer is trending hotter in the forecasts and much warmer than normal overall. Natural gas powers many power plants across the country, and is closely linked with demand for electricity.




The other key driver for natural gas is the level of supply and inventory build. We are trending well below seasonal averages for this time of year, even though we are also seeing record levels of drilling. 

Last week, the natrual gas storage report printed a build of 96 Bcf. The 5 year average for this time of year was 91 Bcf. Supplies now stand at 1,913 Bcf heading into this week, which is 507 Bcf below the 5 year average, and 785 Bcf less than this time of year.

Our view is that as inventories continue to run behind previous years and the weather continues to warm, we see a very bullish pattern potentially developing.



chart and analysis by Jason Pfaff


For a fully bulish trend to devlop, we would need to see one or two more closes above the $3.00 level, and for that level to hold on any tests if the price retraces.

In early Monday trading, natural gas had fallen back below the $3.00 level. Traders should be mindful that hgher levels of volatility have returned to gas furtures over the past few days. We should expect this trend to continue over the balance of this week, peaking especially around the inventory report on Thursday and Rig Count report on Friday.


chart built by Jason Pfaff in TradingView


Looking to this week, traders could explore a volatility based trade by buying a strike price above the current level of the underlying market and selling a strike below the current level of the underlying market. With a week of trading ahead of us, and critical, market moving data later in the week, we should see this level of price movement to continue or even potentially escalate. 





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