The practice of selling rallies in bear markets may be old, but it never gets tiring. I am sticking with that strategy until there is a measurable change in the outlook for natural gas.
The EIA inventory numbers were released this morning and showed a build of 98 billion cubic feet for the week ending October 4. The average analyst estimate called for a build of 97 billion cubic feet. The bottom line is that supplies are more than ample and I believe this pattern will continue into the near future – if not get worse.
I don’t see the demand part of the equations changing this picture anytime soon. The economy is trending toward slower growth and producers continue pumping out gas at a high rate. A mild summer this year didn’t help much to eat into supplies. Now, all eyes are on the winter weather. It looks like that could be the main variable to pull this market out of the low $2 range. However, hoping for adverse weather to move a market is usually not a sound bet.
I wrote in a previous natural gas article how $2.70 would likely be the high end of the range. The market reversed right around that level and dropped down to about $2.20 currently. I still see $2 as being close to the bottom of the range, but the market would need to fall below that level before I would see a long-term value play. Natural gas trading down to about $1.80 is not out of the question.
Natural gas prices will likely jump during the inevitable stints of extreme cold weather this winter. I would see any future rallies into the mid-$2 range as selling opportunities. Natural gas is no stranger to having exciting rallies (and selloffs), but I would expect them to be short lived unless we see prolonged extreme cold that can measurably change the supply/demand picture.
Another headwind facing natural gas prices is the market tends to move lower from later October into year end. That is one negative variable, but it is one among many.
I know there are some traders who are expecting a rally since prices are at the low end of the historic range. A good argument could be made for buying gas around $2 and selling up around $2.50. That could very well be a trading range for a while. I would prefer to just play the short side of this market regardless of how low prices appear from a long term perspective.
There is also the strategy of scale trading this market. That is the process of buying at/near historic lows and adding to positions at progressively lower levels, while expecting the market to eventually revert back to at least average prices. That is a longer discussion, but I recommend doing more research if you are interested in this strategy. Scale trading also requires a trader to have a sizeable account with plenty of money in reserve and can still be very risky. Markets that are in solid downtrends can still move much lower than their last 10+ year lows.
Feel free to contact me to see how I would recommend timing trades in natural gas for my clients, as well as profit objectives and risk levels.
Chuck Kowalski
630-485-2100, ext 532
contact@futuresbuzz.com
