This week in the SIACharts Equity Leaders Weekly, we will re-examine a key commodity in natural gas using the Natural Gas Continuous Contract (NG.F). In the second chart we will look at a comparison of natural gas, the commodity, to natural gas equities to see how this relationship has played out over the last year and a bit.
On Tuesday, there was a big shock to the Canadian natural gas landscape with Malaysian energy company Petronas and its partners deciding to cancel the $36 billion Pacific NorthWest LNG project in British Columbia. This is unfortunate news as this project would have been one of Canada’s largest private infrastructure investments. BC Energy Minister Michelle Mungall cited the company saying that the decision was due to the “economic challenges in the global energy marketplace.” Mungall also stated that the government plans to work to make B.C. competitive in the global LNG industry as other proposed West Coast LNG projects are in various stages of development.
Natural Gas Continuous Contract (NG.F)
We last looked at Natural Gas Continuous Contract (NG.F) on April 13, 2017, and since then have seen a quite volatile commodity price. At that time, NG.F was sitting at $3.19 after recovering from it’s 2017 lows in March around $2.70. The run up after that point was short lived after the commodity found some resistance at the $3.50 mark and reversed into a column of O’s with May and June both posting down months and pulling back to just below $2.88. In the shorter term, we have seen NG.F finish down on 6 of the last 7 trading sessions. Traders and investors will be looking to the weekly Energy Information Administration Inventory Report tomorrow where analysts are expecting a build in the range of 22-32 bcf. Last week’s report saw a build of 28 bcf which put total supplies at 2.973 tcf which stands 9.1% lower than this time last year, but still puts inventories 4.6% above the five-year average for this week.
Looking at the chart we can see for NG.F sitting near support at $2.82. A break below this could see further support come into play around the $2.66 to $2.61 level. Should a three box reversal form into a column of X’s NG.F may find some resistance at $3.12 and ~$3.50. With a current SMAX for the NG.F sitting at a 4 out of 10, it is exhibiting some near-term weakness versus all asset classes.
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Natural Gas Continuous Contract (NG.F) vs. First Trust ISE-Revere Natural Gas ETF (FCG)
Next we will take a look at a comparison chart of Natural Gas Continuous Contract (NG.F) versus the First Trust ISE-Revere Natural Gas ETF (FCG) to get a view of how the natural gas commodity has done relative to U.S. natural gas equities. The First Trust ISE-Revere Natural Gas ETF (FCG) seeks to track the investment results of an equity index called the ISE-Revere Natural Gas™ Index. The ISE-Revere Natural Gas Index is an equal-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the exploration and production of natural gas.
Looking at a 2% comparison chart we can see that through the first half of 2016, the downtrend seen in the chart is in favor of FCG. This means that the natural gas equities were out performing the commodity. This trend reached a bottom in March 2016 and broke through the downtrend line in June, signalling strength to the commodity. This uptrend in the chart is still in tact today, however, we can see the chart did break below the long-term uptrend line in February, only to strongly reverse in favor of the commodity through March and April. Since May, we have seen a short-term consolidation with little conviction in either direction for the equities vs the commodity with some recent strength to the equities. It will be interesting to see if the chart will reverse and continue in favor of NG.F, or if the market begins to price in the outperformance in the commodity relative to natural gas equities and we begin to see more O’s than X’s. A breakout on either side of the consolidation pattern (see: the black box in the chart) could signal further strength in that direction with a break upwards in favor of the commodity and a break downwards in favor of the equities.
As a reminder, the VS SMAX score is a short term relative strength measure between the two securities that are being compared. A VS SMAX greater than 5 is in favor of the numerator in the chart and a VS SMAX less than 5 is in favor of the denominator. The VS SMAX of 6 out of 10 is signalling short-term relative strength to NG.F over FCG.
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