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Can natural gas futures sustain massive bull market run into November?


If you have been focusing on gold and silver prices in recent weeks, you have been missing out on a massive rally in the natural gas futures market.

The benchmark Henry Hub front month natural gas futures contract has popped from about $1.50 in late June to run a spectacular bull phase through August and September.

Natural gas futures were trading just north of $3 at the time of writing, having retreated slightly in the last few days. Natural gas is up over 33% on a 12 month basis, and close to its  52 week high. It is raising questions over whether this bull market run can be sustained, but we are entering the cold period in the northern hemisphere, raising hopes from some traders that natural gas has more to come.

“The CME-traded contract is benefiting from forecasts of an expected cold winter,” says James Sweeney, an analyst with City Index. “Indeed, traders are betting on a La Nina Effect, which is considered the cold phase of El Nino. From a technical point of view, the daily relative strength index is on the upside. Traders should consider long positions above $2.90.

The natural gas contract in Chicago has just broken a key resistance level at around $2.90 which had been tested earlier in the year. New resistance levels are set up at $3.20 and $3.40, according to City Index.

Hurricane season has driven natural gas futures prices

Hurricane season is also fuelling prices, with Hurricane Delta hitting the same coastline in the Gulf of Mexico as Hurricane Laura. Traders have also taken note that Warren Buffett’s Berkshire Hathaway has bought the natural gas pipeline and transmission assets of Dominion Energy for $10bn in cash and assumed debt, when energy prices were hitting 25 year lows this summer. This was looked on as a bargain basement acquisition in true Buffett style and a market for potential low points in energy prices.

Note, however, that onshore natural gas stockpiles in the US market are approaching an all-time high (natural gas inventories are at 3.87 trillion cubic feet, not far from the record of 4.04 trn), just as the US market starts to tap into gas reserves. There are also worries in the gas industry about the US election, and possible new energy policies from a potential Joe Biden administration in January.

November withdrawal period has always been good for gas

Historically, natural gas futures tend to rally just ahead of the so-called withdrawal season, when the weather gets colder in the US and consumers start to tap into reserves. This is usually in November. If further contributions are made to US gas reserves, and they pass the psychologically important 4trn cubic feet level, this could precipitate a retreat for natural gas futures prices.

CFD traders of natural gas futures should also note that COVID will continue to have an impact on the US economy over the winter months regardless, and this could end up being a significant bearish factor on both oil and gas futures. Traders made money on shorting natural gas over the period from November 2018 through to June 2020, so be cognizant of potential short trends emerging in this energy market.

Short traders need to be cautious about jumping into short gas positions too quickly however: a win for the Democrats next months could presage a crackdown on some sources of natural gas (e.g. fracking) which will lead to some supply being turned off. The market could react to this with some short term upside spikes in November/December.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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