Natural gas prices declined from a peak in February 2014 to a low in March 2016. What’s interesting is that the commercials (hedgers) were increasing their net-long position in the same period, anticipating a rally that didn’t occur. The commercial net-long position peaked in June 2015, which put more pressure on prices as positions were liquidated into the March 2016 low.
Since the low of March 2016, the commercials have been fluctuating between net long and net short positions. What’s also interesting is that open interest continues to increase to its highest levels since June 2013 as the commercials remain close to net neutral as far as commitment is concerned. Historically, increasing open interest with a commercial net long position buildup would be bullish for prices. But, from the February 2014 peak in price to the March 2016 low, commercials had been wrong. In fact, they have been wrong twice. In an earlier period, the commercials remained net long from July 2008 to the April 2012 low and then some.
On a technical basis, a cycle high was made in January 2010, a cycle low was made in April 2012, another cycle high was made in February 2014 and a cycle low in March 2016. We observe that the February 2014 cycle high did not trade above the January 2010 cycle high, which would indicate a cycle high failure suggesting lower prices, which took place into March 2016. But, the cycle low of March 2016 traded and tested the cycle low of April 2012 by making a new low and reversing higher ever since in an upward channel (see “Gas swings”). This appears to have set a major bottom.
In the meantime, demand is growing. According to the American Gas Association (AGA), natural gas serves nearly 66.7 million homes; 5.4 million businesses; 192,000 factories and 1,900 electric generating units. Natural gas comprises almost one-fourth of all primary U.S. energy needs and is directly linked to jobs and economic health. Residential space heating and water heating cost analyses show that natural gas costs less to use than other major home energy sources. Households that use natural gas appliances spend an average of $840 less per year than homes using electric appliances. Fertilizer used to grow crops is composed almost entirely of natural gas components, so U.S. agricultural producers rely on an affordable, stable supply of natural gas.
And U.S. producers are just beginning to export liquefied natural gas; that has the potential transform a mainly domestic market to a global one with rising demand.
Climate change not withstanding, a cycle high in temperatures may have been reached and the earth could enter a cooling period. In 2016, data from National Oceanic and Atmosphere Administration (NOAA) shows that more than 200,000 heat, cold and precipitation records were broken across the globe. Nearly 60% of the records were warm, about 28% were precipitation and snow and the rest were cold.
However, in early 2017 NOAA noted that some of the coldest recorded temperatures were seen across northern U.S., Europe, Asia and Russia. You do not need to deny climate change to understand cycles will require colder periods (even within the broader warming trend). Assuming we get a new and very strong cooler La Niña pattern along with extremely low solar activity, we may see a brief cool down of the Earth’s temperature around the early 2020s, thus the need for more use of natural gas.
The technical pictures indicates natural gas is at the beginning on a major swing higher. On a fundamental basis, natural gas usage has the potential to increase both domestically and globally as producers find ways to export through LNG.
Disclosure: The author holds positions in UGAZ, SWN and CHK.