The Flame Of Natural Gas Is Flickering Out

Intermediate
  • As the Fed indicate rate cuts are coming gold will keep rising over the summer
  • There is a disconnect between asset price inflation and the real economy
  • Earnings will be flat or disappointing and too much debt has little or negative yield

U.S. Natural Gas futures look to be ready to break below the $2.00 mark as the gap between the spot price and the key 50 and 200-day moving averages widens.

Natural Gas USD/Mm BTU 12 months

Source: www.investing.com, Spotlight Ideas

This suggests that it could be looking to break below the level of $2.00, a mark that has been a baseline since late April 2016.

This is now the second consecutive week where gas in storage is expected to have grown above what are regarded as normal levels for the time of year. This is surprising as the recent period of extreme heat would have led to a surge in demand for natural gas to feed higher electricity demand for air-conditioning.

Do not be misled by the fact that the EIA (U.S. Energy Information Administration) reported an increase of 55 Bcf (billion cubic feet) in natural gas inventories for the week ended August 2. I accept that a Reuters poll estimated an increase of 59 Bcf for the same week. It is true that the smaller-than-expected increase in inventories pushed natural gas higher. The question is can such an improvement in prices last? I suggest the answer is no.

The actual increase was a 20% build on the same week a year ago, despite recent outages caused by a pipeline explosion in Kentucky. Let us put the increase in context as it follows on the heels of large builds of storage, i.e. in the previous week to July 26, injections amounted to 65 bcf, versus 31 bcf a year earlier and a five-year average of 37 bcf. This can only imply greater pricing pressure in the market.

On Wednesday, September gas on New York Mercantile Exchange’s Henry Hub hit a low of 2.03 and if the $2 support collapses next week, it could cast a shadow over all energy stocks.

On August 8, natural gas prices were 5.4%, 8.6%, 14.7%, and 28.9%, respectively, below their 20-, 50-, 100-, and 200-day moving averages. Moreover, as the second chart in this note shows the negative difference between the 50-day and 200-day moving average is at its highest level since late January.

Prices below the key moving averages and the expansion in the negative difference between 50- and 200-day moving averages suggest a bearish trend.

Natural Gas Spot Less Moving Averages (12 months)

Source: www.investing.com, Spotlight Ideas

Natural Gas Futures: 12-Month Chart With Extrapolation

Source: www.investing.com, Spotlight Ideas

Summary:
Sell now and target 1.40
Stop at 2.45

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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