BOLD - 3 Reasons Natural Gas Could SHOCK to the Upside

• Reason one- Georgia will determine US energy policy

• Reason two- The rig count is low while the demand for LNG rises

• Reason three- A value investor gave natural gas a bullish wink in early July

Natural gas is one of the most volatile commodities that trade on the futures exchange. The price can double, halve, or more over a short period. The most recent example came from June 2020 through October when the nearby futures rose from a quarter-of-a-century low of $1.432 per MMBtu to a high of $3.396. The price was back at the $2.65 level at the end of last week. Natural gas rallied early going into the winter season. The latest move lower is also a bit premature.

Trading natural gas is not for the faint of heart as the price of the energy commodity always has the potential for price explosions or implosions in the blink of an eye.

We are now heading into the beginning of the peak season for demand in the natural gas futures arena. The price tends to peak each year from November through February, depending on the winter conditions. Natural gas inventories typically decline from November through March and rise during the spring, summer, and early fall seasons. The weather conditions across the US usually determine the price action in the energy commodity.

2020 is far from a typical year in all markets, and natural gas is no exception. Aside from the impact of the global pandemic on energy demand, US energy policy could undergo a significant change in the coming months.

We should fasten our seatbelts for lots of volatility in the natural gas market over the coming weeks and months. Three factors could push the price substantially higher, regardless of seasonality.

The United States Natural Gas Fund (UNG) moves higher and lower with the price of NYMEX natural gas futures. The BOIL and KOLD ETN products provide market participants with a short-term leveraged return based on natural gas price volatility.

Reason one- Georgia will determine US energy policy 

Natural gas has Georgia on its mind as it heads into the peak season for demand. No candidate in the November 3 election received over 50% of the vote, setting up a pair of runoff elections on January 5. With the current composition of the new Senate at fifty seats for Republicans and forty-eight for Democrats, Georgia’s two Senate contests will determine the majority. If Democrats win both elections, they will take over control as Vice President-elect Harris will have the deciding vote. The gavel will move from Kentucky Senator and the current majority leader Mitch McConnell to New York Senator and current minority leader Chuck Schumer. A majority of Democrats would make for clear sailing for President-elect Biden’s agenda and would likely result in more pressure to pursue progressive legislation. The Democrats favor stricter energy regulation, while the progressives advocate for limits or a ban on fracking. Republicans favor policies that support US energy independence.

The future of natural gas output is in the hands of Georgia’s voters on January 5 in races that will determine the Senate’s majority. Politics could create even more volatility in the natural gas market when the weather tends to increase price variance. If Democrats manage to post another victory, we are likely to see natural gas production decline, which could be highly supportive of prices.

Reason two- The rig count is low while the demand for LNG rises

Low natural gas and energy prices have created problems for producers in 2020. High debt levels have threatened the future survival of many smaller producers. Low-interest rates encouraged debt. Low gas and oil prices have made it more than a challenge for producers to service their debt levels.

The natural gas futures price has been falling like a stone since reaching the highest price since January 2019 at $3.396 per MMBtu on October 30.  The high occurred after hurricanes hit the Gulf of Mexico in September and October, and an early cold snap across wide areas of the US increased the demand for heating.

Source: CQG

The daily chart shows that December futures fell to a low of $2.677 on November 16, 21.2% below the October 30 high. The spike lower last Monday left a gap on the daily chart from $2.949 to $2.887.

Meanwhile, the bearish technical price action comes at a time when production is falling. According to Baker Hughes, the number of natural gas rigs operating in the US as of November 13 was 76, 53 lower than in mid-November 2019, when it stood at 129 rigs. The falling rig count is bullish for the natural gas price on a long-term basis.

Reason three- A value investor gave natural gas a bullish wink in early July

Natural gas hit a quarter-of-a-century low at the end of June when it traded down to $1.432 per MMBtu. A few short days after the price of the energy commodity declined to the lowest price since 1995, Warren Buffett announced that Berkshire Hathaway acquired Dominion Energy’s (D) transmission and pipeline assets for $4 billion in cash and $6 billion in acquired debt. The deal increased Berkshire’s control of its US interstate natural gas transmission from 8% to 18%. The value investor increased his exposure to natural gas in a signal to the market that the price of the energy commodity was too low.

Source: CQG

The weekly chart shows that either the acquisition’s timing was serendipitous, or it ignited the natural gas futures market.

Price variance in the natural gas futures market can be shocking at times. The price has a history of rising and falling to unsustainable levels. Declining production as worldwide demand for LNG rises could establish a pattern of higher lows. Moreover, a substantial shift in US energy policy under the incoming Biden administration could create deficits in the market where demand rises above supplies. Warren Buffet saw value in the natural gas market in June. He apparently expects the price to rise, which could be a good reason to buy natural gas during periods of price weakness.

The most recent sharp decline in the price of the energy commodity could be another chance to buy before the start of the winter season and voters in Georgia's head back to the polls.

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UNG shares were trading at $10.45 per share on Tuesday afternoon, up $0.24 (+2.35%). Year-to-date, UNG has declined -38.02%, versus a 14.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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