Stalemate!

Fundamentals

It appears that Natural Gas traders are already looking towards spring and an end to the traditional gas storage draw season, as not even the withdrawal of 190 billion cubic feet (bcf) last week could spark a rally in Natural Gas futures. The 190 bcf withdrawal appeared bullish — especially when compared to last year’s 44 bcf draw and the 5-year average of 129 bcf of gas taken out of storage. The particularly brutal winter weather in the eastern half of the U.S. has certainly lessened the burdensome supplies of Natural Gas we had going into the winter, with current inventories standing at 2.025 trillion cubic feet (tcf), which is 2.7% above the 5-year average, but only 1.3% above last year’s totals. However, traders seem to be ignoring weather forecasts calling for below normal temperatures in the eastern regions of the U.S. over the next couple of weeks and are focusing on industrial demand, which still has not shown sufficient signs of improvement — at least not enough to placate traders’ fears that gas storage levels will be plentiful once warmer weather approaches. Gas drillers in the U.S. are also starting to increase their operating rig counts, as well, which should keep U.S. gas supplies ample. So unless there is a major supply disruption or industrial demand improves dramatically, Natural Gas futures prices appear to be heading for a consolidation phase until either bullish or bearish fundamentals win out.

Trading Ideas

It sure looks like neither bulls nor bears have the upper hand in the Natural Gas market — at least in the short-term — which sets up potential trading opportunities that may benefit from a sideways market. Looking at a chart for April Natural Gas futures, we notice price consolidation between 6.250 on the highs and 4.600 on the lows. A trader looking for April Gas to continue to trade within these boundaries may wish to consider selling a strangle in April Natural Gas. An example of this trade would be selling the April 6.25 calls and selling the April 4.50 puts. With April Gas selling at 5.216 as of this writing, the strangle could be sold for about 0.058 points, or $580 per strangle, not including commissions. The premium received is the maximum potential gain on the trade. Given the inherent risks involved in selling naked options, traders should have a pre-determined exit point in the event the trade moves against them, such as closing out the trade early if April Natural Gas trades above the call strike price or below the put strike price before option expiration in March.

Technicals

Looking at the daily chart for April Natural Gas, we notice prices forming what appears to be a symmetrical triangle pattern. This chart formation is considered an area of indecision where neither bulls nor bears have the upper hand. Prices are currently slightly below both the 20 and 100-day moving averages, giving a slight edge to gas bears. The 14-day RSI is in neutral territory, with a current reading of 43.74. Minor support is seen at January 28th lows of 5.056, with major support at 4.595. Minor resistance is seen at the February 8th highs of 5.638, with major resistance seen at 6.180.

Mike Zarembski, Senior Commodity Analyst