Bearish Bets Against Natural Gas: A Potential Springboard for Prices?
Bearish Bets Against Natural Gas: A Potential Springboard for Prices?
Could natural gas be on the verge of a turnaround?
- Natural gas prices fall to fresh yearly lows as fundamentals sour further.
- Warm weather forecasts may keep pressure on prices in the short term.
- However, elevated short positioning could put bears at risk.
Is it time to go long natural gas? That’s a question on a lot of traders’ minds lately, with prices (/NGH4) at the lowest since July 2020 following three weeks of losses that saw the commodity drop by about 40% from levels traded in January.
The price action has attracted a lot of attention as traders look to call a bottom in the commodity. While enticing, a deep and protracted selloff doesn’t necessarily mean that prices will swing wildly in the opposite direction. There are reasons why prices have fallen so far and so fast.
Mild weather is bad for natural gas
The primary reason is the weather, particularly the above-average temperatures seen over much of the United States over much of the winter when natural gas inventories are drawn to support heating demand. The chart below from the Energy Information Administration (EIA) shows how warm the temperatures have been over the last few weeks compared to normal.
Mild weather has limited demand for the gas and allowed inventories to trend above seasonal averages. The chart below shows that lower 48 working gas is above seasonal norms, with inventory in underground storage at 2,584 billion cubic feet (Bcf) as of Friday, Feb. 2, according to the EIA. That is 248 Bfc above the five-year average. With weather forecasts showing no relief from warm temps over the next several weeks, we’ll see this trend continue.
Short positioning leaves bears vulnerable
Despite the bearish fundamentals, shorts may have overplayed their hand.
Positioning data from the Commodity Futures Trading Commission’s Commitments of Traders (COT) report shows that non-commercial shorts, otherwise known as speculators, have had the largest short position since December. That corresponded with a rally from multi-year lows. The elevated short position leaves prices at risk from a short covering scenario.
Trading natural gas
On Wednesday, we discussed the trade setup on Options Trading Concepts Live (OTCL). The trades were a long /QGH4. You could also play the larger /NG contract and use options to sell a put spread if that is more your style.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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