This is the daily chart of UNG, the largest natural gas ETF. Prices have fallen off a cliff – down from $26.50 in mid-June to $20.72 at the close of trading yesterday.

UNG-2014-07-29_1617

That’s a fall of nearly 22% in just over a month. Yesterday’s bearish engulfing pattern is likely signalling further downside to follow. What’s ailing natural gas?

Natural gas: record inventory build up

“Nearly midway through the summer storage injection season, working natural gas in storage is on pace to meet EIA’s expectations for a record overall build,” says Katie Teller of the US Energy Information Administration in her note of July 28, 2014. “The current Short-Term Energy Outlook projects a record build of close to 2,600 billion cubic feet (Bcf) from the beginning of April through the end of October, which would put inventories at 3,431 Bcf at the end of October.”

EIA-graphs Natural Gas
Natural Gas

Natural gas: above normal storage injections

Above –normal injections of natural gas into storage have been caused by the twin factors of strong domestic production and lower demand due to a cooler-than-expected summer, explains the analyst.

“Natural gas marketed production has continued to set records as new wells come online in the Marcellus and Eagle Ford shale formations, and EIA expects production growth will continue,” says the note. “EIA expects (Short-Term Energy Outlook) that demand from the electric power sector, April through October will remain flat compared with last year while natural gas production is about 3 Bcf per day greater this summer compared to last summer.”

As a result natural gas injections into storage after May have been much higher than the five-year weekly average levels. Indeed, net injections into storage inventories aggregated 1.04 trillion cubic feet during April 25 through July 4 – the fastest trillion cubic feet build-up witnessed since 2003.

By October, the increase in natural gas storage is expected to be over 2.6 trillion cubic feet, taking inventory to 3,431 billion cubic feet.

Natural Gas – Bulls rushing for the exits

According to Bloomberg, net long positions held by hedge funds dropped 11% in the week ended July 22, as per CFTC data. Bullish positions have been cut by over half since February of this year, and prices have dropped below the crucial $4 level.

The report said that prices could fall further in the next three months, due to mild weather and higher production. “While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to U.S. gas prices in the next three months,” Daniel Quigley, a Goldman analyst in London, said in a note on July 22, and quoted by Bloomberg.