Natural Gas: $4.50 Is The Line In The Sand…

| January 16, 2014 | 0 Comments

natural gasNo doubt about it, tomorrow’s US Energy Information Administration (EIA) natural gas inventory report is going to be a whopper…

As you may be aware, a “Polar Vortex” encompassed a large swath of the US in bitterly cold temperatures last week.   Thanks to the frigid weather, consumers likely cranked up natural gas demand to record levels for the week of January 10th.

In fact, analysts’ consensus estimate for tomorrow’s release is an astonishing 300 billion cubic foot (bcf) draw… 

If that number comes to fruition, it will eclipse the previous record weekly draw of -285 bcf set on December 19th, 2013.  The fact we’re seeing back-to-back record withdrawals has US natural gas inventories in steep decline.

See for yourself…

EIA Report

As you can see from the blue line in the chart above, current inventories are already at the bottom of the 5-year average range (gray shaded area).  If tomorrow’s withdrawal reading is as big as experts are suggesting, we could see inventories fall completely out of the range.

So what does all this mean for the price of natural gas?

Not surprisingly, investors are bidding up the commodity ahead of tomorrow’s report.

Take a look…

Natural Gas

After a steep decline last week, natural gas is once again approaching the late December high of $4.50 mmBtu.  Investors are clearly preparing for the high likelihood of another enormous draw on US supplies.

But here’s the deal…

For natural gas to jump above this important level of technical resistance, we’ll need an absolute blowout number from the EIA tomorrow.  I’m talking a number beyond the 300 bcf estimate put forth by analysts.

What’s more, the market will need a continued run of below normal US temperatures to keep gas demand elevated.

If either of those scenarios doesn’t happen, the $4.50 resistance area will likely prove an opportune selling opportunity for bulls.

What’s your take?

If you think natural gas is going to roar above $4.50 in the near future, you can buy the US Natural Gas Fund (UNG).  As long-time readers are aware, we’ve used UNG many times in the past to capitalize on increasing natural gas prices.

On the other hand, if you feel natural gas is nearing a seasonal high, you can add the VelocityShares 3x Inverse Natural Gas ETN (DGAZ) to your portfolio.

Since DGAZ is an inverse ETN, it will rise if the price of natural gas declines.  What’s more, since it’s also triple-leveraged, DGAZ will rise at 3 times the rate natural gas falls.

But be careful…

This extra leverage is a double-edged sword.

If natural gas eclipses the $4.50 technical resistance area and runs towards $5.00, DGAZ will decline quickly.  This means you’ll need to size your purchase appropriately to account for the increased risk in holding DGAZ in your portfolio.

Until Next Time,

Justin Bennett

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Category: Natural Gas

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.