Looking to Get Long Natural Gas? Now May Be Your Chance.

The froth seems to have come out of the natural gas market now that the futures have fallen over 30% since hitting new highs earlier this week. Yesterday, natural gas was down just 0.9% (compared to the multiple 10%+ moves the market has seen this month).

Yesterday was inventory day, and the EIA reported that supply fell by -95 Bcf vs. (E) -101 Bcf, so a slightly smaller draw than expected.  But, unlike in recent weeks, the market had little reaction and the fact that the market didn’t sell off on the news is what leads me to believe the “froth” is indeed out of the market.

As we near the end of the draw season, supply levels are more than 35% below the five-year average. Approaching the critical 1,200 Bcf mark leaves natural gas users with little margin for error as we enter the build season. Technically the situation in nat gas is also bullish as front month futures hit support yesterday around the $4.45 level. That support level is the same technical up trend that has been in place since the “big rally” began back in early November.

You would have to have a big tolerance for volatility, but for the first time in 2+ months, I can make the case for buying natural gas itself at these levels (via UNG or the futures), as your stop is clearly a violation of that trendline dating back to November.  I’d continue to hold natural gas E&P ETFs as well in here, and look to add or initiate positions on any further weakness.