Natural gas stocks have peaked this seasonal cycle and are on the way down. Shale drilling has made the U.S. one of the world’s lowest-cost sources of natural gas on the planet. Companies are investing billions to exploit gas as either an exportable product or even as a feedstock for manufacturing but that doesn’t mean you should be buying natural gas stocks.

Natural gas has entered the time of year when drawdowns are normal through April of the next year. The average period of seasonal strength for natural gas peaks in the middle of December, which marks the official start of the winter season.

Natural Gas Storage Seasonality Trend

The Natural Gas ETF UNG is trading within a Symmetrical Triangle pattern, which suggests we could have an explosive move out of the pattern.

Chart of UNG

Most un-trained retail traders think that now is the time to go long natural gas as inventories drop from winter season. The opposite is true as the market prices in the future anywhere from 2 to 6 months. You can see this in the seasonality chart of the Natural Gas ETF UNG.

Seasonality pattern of UNG

The seasonality of UNG chart above shows that in December, only 25% of the time does UNG end the month higher than where it started the month. The average decline of UNG is -6% in December.

The risk versus reward for natural gas stocks is no longer in favor of the bulls. With the Symmetrical Triangle pattern on UNG, there could be an explosive move lower which would be too late to exit UNG long positions. I recommend taking profits in natural gas. The next period of seasonal strength for natural gas stocks comes in March of 2019.

Shale drilling has made the U.S. one of the world’s lowest-cost sources of natural gas on the planet. With global demand for liquefied natural gas accelerating, 2019 could be a very profitable year for LNG exporters in the U.S. which is bullish for natural gas stocks.

Shale drilling has produced a surplus of “associated gas”. Associated gas is the natural gas produced as a byproduct of oil wells. In oil-centric shale basins such as the Permian Basin, producers are burning associated gas at the wellhead at an estimated rate of as much as 7.7 billion cubic feet per month because there isn’t adequate pipeline capacity to take it away.

There’s more than 500 trillion cubic feet of associated gas in the Permian Basin alone. In some cases, producers are better off giving gas away in pipelines simply because of the environmental regulatory costs of flaring gas over the long term.

Companies looking to source cheap natural gas are going to inevitably build the pipelines and infrastructure necessary to exploit that associated gas and it will have a big impact on natural gas spot prices. Even the lowest-cost natural gas producers can’t compete with the low cost of associated gas. While there isn’t enough associated gas to supply the entire market, there’s enough to keep natural gas supply high and thus prices low for years.

Disclosure: I do not hold any position in UNG.

Natural Gas In the News