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Keep Your Eyes on Natural Gas

April 26, 2024

From the Desk of Ian Culley @IanCulley

Natural gas futures are due for a pop.

It might sound silly as the widow-maker is falling back toward its mid-1990s lows.

But this is a logical level to witness a sustained rally. Especially when you consider previous cycles and where Natural Gas is trading relative to crude…

Earlier this week, JC mentioned the crude oil vs. natural gas ratio during an internal strategy session.

He tracked this relationship when he day-traded natty gas, using it as a mean reversion indicator.

Fast-forward to today, and the crude-to-natural-gas ratio is retreating from its highest level in more than a decade.

The last time the ratio hit these levels, natural gas futures ripped 225% in less than two years. 

That’s what natty gas does! It also peaks and troughs – almost like clockwork – within a four-year cycle:

Notice the cyclical lows in 2012, 2016, and 2020 corresponding with the cycle highs in 2014, 2018, and 2022.

Interestingly, a seasonal component also emerges at the cycle lows as natural gas enters its most bullish three-month period (August - October). All three former troughs bottomed in the spring and completed bullish reversal patterns by summer.

It’s a beautiful example of a mean-reverting commodity market, swinging back and forth beyond the mean. 

But before we load the boat with natty gas futures, we must witness a decisive break above 2.13:

Our level coincides with the 2023 lows and this week’s closing high, forming a key polarity zone.

Despite the high probability of a cyclical low already in place, the bulls must break through price memory at this critical level before signaling a buy. (They call Natty Gas the widow-maker for a reason.)

The same level applies to the US Natural Gas Fund ETF $UNG.

I prefer to use the futures contract when measuring risk, even while expressing a bullish thesis with UNG. (This is due to UNG’s roll structure and the disparity between underlying trends.)

Nevertheless, UNG is a viable option once a buy signal triggers in the futures market.

Natty gas will likely break out while everyone is at the beach – sandy, burnt, and water-logged. 

I know I’ll be all three. But I won’t be crabby because I missed the natty gas trade.

Are you preparing for the next cyclical bull run in Natural Gas?

If so, how are you playing it?


COT Heatmap Highlights

  • Commercial hedgers posted another three-year record-long position for the Swiss franc and Japanese yen.
  • Commercials' net-short position for copper pulls within two percent of a new three-year extreme. 
  • Commercials dropped 6,650 contracts from their long KC wheat position after reaching their largest reading in three years. 

Click here to download the All Star Charts COT Heatmap.

Trade of the Week

Today, we’re outlining Shell PLC $SHEL, the $233B oil & gas behemoth:

SHEL is retesting its former 2018 highs. A decisive close above those former highs triggers our buy signal.

We're long SHEL above 74, targeting 106 in the coming 3-6 months.

However, we wouldn't be surprised if price consolidates as buyers absorb overhead supply. SHEL is a no-touch as long as it trades below our risk level.

Thanks for reading.

As always, let us know what you think. We love hearing from you.

And be sure to download this week’s Commodity Report below!

Click here to download the Commodity Report Chartbook.

Allstarcharts Team

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