Each Thursday, the U.S. Energy Information Administration (EIA) releases its natural gas storage report. When the storage numbers are lower than expected, natural gas prices tend to rise because of the decrease in supply. When the storage numbers are higher than expected, natural gas prices tend to fall because of the increase in supply. On Thursday, the EIA announced higher-than-expected storage numbers, and natural gas prices fell — bringing the U.S. National Gas Fund (UNG) down with them.
Click to EnlargeThat downward move pushed UNG down through a strong support level at $21, completing a head-and-shoulders reversal pattern late last week. Based on the height of the previous pattern ($24 at the head – $21 at the neckline = height of $3), we expect UNG to drop to $18 ($21 breakout point – $3 = $18) in the coming weeks. This movement would line up nicely in the pattern we have seen on this ETF in the past. Since last August, UNG has switched back and forth from trading in a range between ~$17.50 and ~$20.50 to trading in a range between ~$20.50 and ~$23.50. On Monday, the ETF closed at $20.28. This latest shift to the downside should push the fund back into the lower range.
Some investors had been bidding the price of natural gas higher on the expectation that natural gas exporting proposals would be approved — the Obama administration just approved Freeport LNG to export chilled natural gas out of the U.S. — and that would lead to greater demand for the growing supplies of natural gas we have in the U.S. However, gas production seems to be outstripping any export expectations at the moment, and we all know that if demand can’t keep up with supply, prices drop. We look forward to watching UNG drop as natural gas prices continue to fall.
Recommendation: Buy to open the UNG July 19 Puts (UNG130720P00019000).
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.