Parabolic Natural Gas Explored

Posted on 11/15/2018 4:16 PM

The following includes excerpts from three experts, each discussing the recent parabolic move in natural gas futures. There are two main reasons to bring this up. The first is the risk that higher natural gas prices will contribute to higher fertilizer prices. The second is an adage mentioned by Roy Huckabay who reminded us of the inverse relationship often observed between WTI crude oil and natural gas futures prices.

These excerpts came from conversations with Chip Flory on AgriTalk After the Bell on Wednesday November 14, 2018. On that day, December natural gas futures opened at $4.07 and rocketed to a daily high of $4.92 before pulling back roughly a dime to end the day up 73 cents, all told, at $4.83. Today, the December contract gave Wednesday's gains back, rising to test $4.80 before posting a daily loss of 93 cents to end the day at $3.90. Click the clips below to hear the opinions of Chip's guests from Wednesday...

Todd "Bubba" Horowitz from BubbaTrading.com

 

  • This kind of move is not unheard of this time of year, especially during a cold snap.
  • If cold snap continues there is room to the upside.
  • Traders overreacting to weather.

Pro Farmer Senior Economist Dan Vaught

 

  • Natgas has been on the rise since a mid-September low.
  • It would be easy to assume that since the move was so sharp and unexpected, the rally will be short-lived. But the momentum gained on the move suggests there is potential for futures to continue higher.
  • WTI crude oil has fallen sharply recently, but the upward move in natgas has been much more severe, implying strength in natgas is overdone by comparison, possibly indicating -- counter to the above -- that a corrective move to the downside is in order for natural gas futures.

Roy Huckabay from the Linn Group in Chicago, Illinois

 

  • Part of the strength in natural gas can be attributed to the inverse relationship it shares with WTI crude oil.
  • Chinese demand is not yet figured-in and is not a contributing factor to the upswing.
  • A trade deal between the U.S. and China will likely include a surge in energy exports to China from the U.S., which would rekindle upside risk in natgas once an agreement is reached.

To say that these three experts arrive at the same conclusion would be to miss their respective points. It does make sense that the three would be talking about natural gas all on the same day as futures skyrocketed. Today's selloff lends welcome support to Horowitz's idea that the market is chasing headlines and seasonal tendencies. It also supports Vaught's idea that the move is overdone respective to crude oil.

But Roy Huckabay also raises a great point when he notes the upside risk involved in increased energy exports to China. I wrote about this last week... the following is an excerpt from the Inputs Monitor Article, "Fuels and Fertilizer At Risk From Same Source"...

"We referenced China's thirst for natural gas in a few articles in the recent past, and the resulting added demand on the world market will seep into overall natural gas pricing. China imports around 40% of its natural gas needs, and that number is projected to rise through 2020. Something else to watch along the lines of China's increasing natural gas needs is the ongoing, but little reported kerfuffle in the petroleum-rich South China sea."Natural gas daily chart

Higher natural gas prices are a concern to farmers as it would support higher fertilizer prices. The experts above had varying things to say, but seasonally, all forms of heating fuels are subject to upside moves like this. The bigger picture from where we sit is the looming upside risk for nitrogen and phosphate prices during the offseason.

Had natgas stopped at the top of last week's range and held steady of fallen, we would not be having this conversation. But natural gas futures pushed very aggressively higher this week, building on last week's gap-and-go rally. We will keep an eye on natural gas futures in hopes Todd Horowitz is correct in saying the trade has it all wrong, or that Dan Vaught was correct that relative to WTI futures, natural gas is way out of bounds and ripe for a downside correction.

Natgas gave back everything that was gained yesterday. But with a snowstorm working its way across the south and into the Eastern Corn Belt as I write this, home heating demand is likely to keep a hard floor under natural gas somewhere above the top end of the gap placed on the front-month chart on Monday November 5.

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