The potential "falling safe" opportunity in natural gas

Key points

• We warned of potential weakness for natural gas on 2024-06-11
• Natural Gas prices have since plunged almost 30%
• However, this key energy market is now entering its most favorable seasonal period of the year
• Unfortunately, the price is still falling hard, thus leaving traders with some critical decisions to make

Natural Gas prices have plunged

Natural Gas prices have declined roughly 30% since we published this piece on 2024-06-11. 

We do not have a "crystal ball" at Sentimentrader.com and do not generally attempt outright "predictions." Our objective is to analyze current events relative to market history and try to identify potential opportunities. Sometimes, they work out great; other times, not at all. In this instance, we merely noted the tendency for natural gas to show weakness from mid-June to mid-July, as shown in the chart from the original piece.

In this case, the natural gas market "followed the script," so to speak. But remember that seasonality is an average of historical results and NOT a roadmap to the future.

Now, natural gas is entering a favorable seasonal period

The chart below displays the annual seasonal trend for natural gas. We are entering the period from Trading Day of Year (TDY) #139 through TDY #196. For 2024, this period extends from the close on 07-15-2024 through 2024-10-02.

As we already said, seasonality is not a roadmap. Nevertheless, it is worth noting that so far in 2024, natural gas has followed its annual seasonal trend relatively closely (note that direction is more meaningful than magnitude in a seasonal chart). If it continues to do so, the months ahead will witness a rebound in natural gas prices.

A closer look at historical results

The chart below displays the hypothetical cumulative $ +(-) from holding a long position in natural gas futures only from the close on TDY #139 through TDY #196 every year since natural gas futures started trading in 1990.

The table below summarizes natural gas futures performance during this seasonal period.

As always, there is no guarantee that natural gas will reverse course and move higher during this period in 2024. Traders must also consider risk management (i.e., when to exit with a loss), as natural gas futures are highly volatile and involve extreme dollar gains and losses.

Non-futures traders can access the natural gas market by buying shares of the United States Natural Gas Fund, LP (ticker UNG) or options on UNG. Those aggressive traders inclined to attempt "to catch the falling safe" that natural gas presently represents can limit their dollar risk completely to an acceptable amount by buying call options on ticker UNG.

What the research tells us…

Natural gas futures tend to rise in price between mid-July and early October. Historically, it has done so roughly three times out of every four years. So, there is never any guarantee from year to year. Additionally, the best time to act on a seasonal trend is when the price is trending in the expected direction. That is not presently the case with natural gas. That said, the second-best time (although for aggressive traders only) to act on a seasonal trend is when price action gets oversold in the case of a bullish seasonal trend (or overbought in the case of a bearish seasonal trend). Regardless of whether a trader chooses to play the long side of natural gas now (after deciding whether to trade futures, UNG shares, or options on UNG) or after an upside reversal in price, the trader is not relieved of the responsibility to allocate capital intelligently and to manage risk ruthlessly.