Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H

Takeaway: Natural gas broke through its key $4.58 @Hedgeye TREND Level of support of $4.58 and may see further downside.

On June 25th natural gas broke through its BULLISH TREND resistance level and confirmed a BEARISH TREND on June 30th.

TREND = duration of 3 months or more

TAIL = duration of 3 years or less

With inflation accelerating and growth slowing, the commodities complex faces upward pressure in 2H. Despite USD-devaluation induced inflationary pressures driving prices, natural gas may have more room to fall without an unpredictable geopolitical catalyst. Instead we'll stick to the multi-duration risk signals for confirmation. We highlighted the downside risk after breaking through its TREND level of support.

It has since sold-off nearly 9%... 

Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Price Volume Graph

The long-term TAIL support Line of $4.20 is under pressure this week, and further downside risk looms without confirmatory long-conviction at $4.20. Spot contracts are down -5.2% this week on NYMEX, so we're watching this level:

  • WTD: -5.2%
  • 1-Week: -6.2%
  • 3-Week: -9.7% 

After breaking out in January, $4.20 has been tested twice. The supply disruption risk has certainly been priced out of markets for the back half of the year.

Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Sep Jan Basis Graph

Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - CFTC Positions

Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Implied Vol

Barring a geopolitical catalyst, a break through the TAIL Line of resistance would signal further downside risk, making the likelihood of re-testing year-to-date highs more extreme. 

Eustream AS penned an agreement with Ukraine on April 28 to supply about 10bcm/year through 2019 via the Vojany pipeline. The pipeline is on track to be fully functioning by September. Vojany, which has been closed for 15 years, would satisfy an estimated 20% of Ukraine’s annual demand. With the capacity of smaller pipelines from Hungary and Poland, Ukraine has the potential to satisfy about 2/3rds of its annual demand directly from countries outside of Russia.

Alternatives aside, the source of this flow is Russian-dependent, but it forces Moscow to involve other European countries without targeting Ukraine in isolation. Putin’s strategy throughout the conflict has been consistent in providing support for pro-Russian separatists while at the same time cooperating with the international community just enough to warrant plausible deniability.

We believe Moscow’s likely goal is likely to maintain and expand its influence in Ukraine's eastern provinces, keeping it weak and vulnerable with existing in the global spotlight. The EIA estimates that Oil and Gas make-up 70% of total annual exports ($515Bn). U.S. and EU-induced sanctions (which have just recently warned of financial and energy sector targeting) would provide further downside for the Russian economy.

Ben Ryan

Analyst