- Money Morning Australia

The Fall of Natural Gas


Written on 28 April 2009 by Gabriel Andre

The Fall of Natural Gas

This commodity seems to have an endless bearish trend. All the other commodities (oil, gold, base metals, agricultural) have more or less benefited from a renewal of risk appetite among investors and eventually prices rebounded after the lows posted everywhere in last December. Prices had declined so sharply in just a few months that it created investment and trading opportunities.

This scenario has been similar for all commodities, except one: natural gas.

The chart is indeed really ugly, and the perspectives for both short and medium-terms are not better. From the high posted early July last year ($14.84, point A on the chart), prices declined by 77%. Last Friday, price closed at $3.4020. If we calculate from the high of October 2005 at $24.47, it’s a fall of 86%!

Natural gas prices have been traditionally positively correlated with oil prices, but a clear discrepancy has appeared in last February between the two energy futures.

Click to enlarge

Indeed, oil prices (red line) have rebounded from February 18 whereas natural gas prices continued their fall. This widening spread between the two prices does not even represent a trading opportunity for hedge funds that design their systems on statistical data. A strategy would be to go “long” on natural gas and to go “short” on oil at the same time to bet on a potential spread tightening, on a probable mean reversion towards a more statistically “normal” ratio.

But obviously nobody wants to take that risk first. Technically, the fall has accelerated on natural gas when the price action broke below $8.5 in early September 2008. This support was built by two previous low points posted in September and December 2007 (points B and C). Prices quickly jumped back above this level (false break) but eventually plunged from October last year.

It’s difficult to analyse the technical indicators (especially the oscillators) as the bearish trend is so sharp without any rebound that prices can remain oversold for a very long period of time. This is typically a market that you should avoid then. You can’t really sell on the current levels. But you can’t take the risk to buy neither. You would then wait for at least a consolidation phase, but mainly for a beginning rebound to potentially bet for a further bounce.



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