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Natural Gas: Death By One Thousand Paper Cuts... Then A Huge Axe Wound

Horrible market action for the bulls.

Inventories approach all-time highs.

A warm "El Nino" winter in the U.S.

Open interest is rising and term structure is in contango.

When everything is bearish - expect the unexpected.

Throughout 2015, active month November NYMEX natural gas futures traded in a relatively narrow range between $2.403 and $3.352 per mmbtu. Over recent months, the range was even narrower as the price has not been above the $3 level since May. All the while, the price action has been horrible for anyone with the faint hope that this market would stage a rally. Every time the energy commodity picked its head up, selling would send it back down to the bottom end of the trading range. For anyone trading natural gas, it was a case of death by one thousand paper cuts. The market did not want to break out in one direction or the other. Even the bears were frustrated, as natural gas did not break through on the downside - that is until very recently. These days natural gas has very little going for it and finally, on Friday, October 23, the price cracked support and traded below $2.30 per mmbtu. Natural gas is now at the lowest level since June 2011 as it closed last Friday at $2.281 per mmbtu.

Horrible market action for the bulls

The weekly chart of NYMEX natural gas futures highlights just how ugly action in this market has been since it made highs at $6.493 in February 2014 during the frigid winter that depleted supplies.

It has been a one-way street since 2014 in natural gas and while I have been waiting for a rally in this forlorn commodity, I have been dead wrong. I like to buy markets that are cheap, but the term is relative. In this case, what was cheap got cheaper.

Huge discoveries of low-cost gas reserves in the Marcellus and Utica shale regions of the United States have established massive reserves of the energy commodity. That is fundamentally bearish. Add to that the overall bear market in commodities that has sent other energy prices plummeting, and it is no surprise that natural gas is now, finally moving lower. Support now stands at the April 2012 lows of $1.902 per mmbtu, and there are no technical support levels between Friday's close and that price.

The weather has not cooperated with natural gas, as it has been picture perfect since that frigid winter in 2014. There have been no sustained cold waves and not one hurricane has threatened natural gas infrastructure. Even a huge increase in seismic activity in fracking regions has not stopped the production of natural gas. This past Friday...