Natural Gas Needs Octane

I have been watching the Natural gas market a bit more of late as it as fallen five straight weeks now (the little bounce in between I guess counts as an up week which makes it four out of five). The selling to the downside has been more aggressive than the Crude market as Natural gas has moved from roughly 14.50 to near the $8 level (interestingly crude has moved from 146 to the 110 level....more to fall?). This has all occurred with a mild summer for the most part and very little storm activity (again) off the gulf. At the same time, inventories are 356 bcf lower than a year ago and basically in line with the 5 year average. Generally speaking, when these two statistics are lower from their respective benchmark and a heat wave sweeps through (or in the winter, a cold snap), Natural gas rally's strong. Since there are neither on the horizon, Natural gas might be destined to continue lower?

However, if you examine weather patterns from year to year, sometimes one can determine what the following season will be like. One could have hypothesized that the great amount of snow that hit the northeast this winter was a leading indicator of how much rain we were going to get this summer. In the past, I have used super hot summers, combined with some other data, to argue we are going to have a mild winter. This time around, I am wondering if the rain (and eventually snow) is going to actually be greater than a year ago. Why do I say this? Because when combined with some heating and cooling degree data, it shows me that there is a chance we will get hit hard this winter with cold weather or just lots of snow which based on the current inventory picture should be supportive for nat gas. Now this is really nothing scientific. I put together a few numbers and came up with a correlation. This correlation argued that natural gas should do well this winter.

What's most interesting about the current move is the timing. Generally speaking over the past 15 years, when Natural gas is rallying, we do not sell off so violently from the highs established at this time of the year (middle of the summer). The big sell offs of this time frame have come later in the year or early in the year post winter. This sell off though occurred in the middle of the summer which could lead to the following: First, if we do get hit by some storm, the low inventory picture could be a spark to send things higher. If we get hit by some volatile weather, with extreme heat, that too could send the price of Nat gas higher through the end of September.

From the price action, the $8 level looks mighty important on the support side. It is a point where if support is not held, the momentum of the action will turn bearish. When combined with some other metrics, this could lead to a full scale breakdown, looking at $6 for a target. Shorter term, the charts are a bit stronger but the major support does not kick in till the $7 level. Overall, the action is oversold. In addition, at the moment, the crude ratio to natural gas resides at 14x which is absurd in my opinion. Generally speaking in the past this has provided support for the natural gas market as it moves back towards the 12 level.

So with that said, we get inventories coming Thursday. I don't have the preliminary numbers at this point but I am sure that if the 5 year and 1 year averages remain higher than the current figure, natural gas should be able to build on that support. When would the reversal come? Probably when we get that "catalyst." That catalyst could be a storm, the weather or just an change of opinion in the pits. I myself...well I remain cautious. It does look kind of interesting at the current levels for a long trade but I think I will keep my powder dry and see what transpires in the days ahead.

Happy trading.