In June 2020, nearby NYMEX natural gas futures fell to $1.44, a quarter-of-a-century low. The energy commodity found a bottom, and Russia’s invasion of Ukraine caused an explosive rally in European natural gas prices and increased the demand for U.S. LNG exports, lit a bullish fuse under the U.S. natural gas futures that took the price to a fourteen-year high a little over two years later, in August 2022.
Meanwhile, an unseasonally warm European winter and plenty of natural gas supplies have pushed the price down to not far over the June 2020 lows in early May 2023.
Natural gas is heading into the 2023 summer, with the price hovering over $2 per MMBtu. Abundant supplies and the bearish trend could push the price below $2 and toward a test of the June 2020 low. In a mid-April Barchart article, I wrote:
Over the past weeks, $2 per MMBtu has become a pivot point. If the nearby futures can hold above the $2 level, a rally to $3 or higher is possible. However, the $1.44 low and critical technical support level remains the target. The bearish trend that took the energy commodity over 80% lower over the past eight months continues as the market is in the early days of the 2023 injection season. Be careful in natural gas, as seasonality does not always dictate the path of least resistance of prices.
The U.S. stockpile level does not favor a recovery, but natural gas has a long history of surprising market participants.
Inventories are at a high level
Stockpiles are a critical factor for fundamental analysts assessing commodities’ supply and demand balance. The U.S. and Russia are, by far, the leading natural gas-producing countries:
The U.S.’s position as the top natural gas producer makes U.S. inventories crucial for the supply and demand equation.
The U.S. Energy Information Administration’s latest report for natural gas in storage across the United States stood at 2.063 trillion cubic feet for the week ending on April 28, 2023. Stocks were 32.6% above last year’s level at the end of April and 19.8% over the five-year average.
The 2022/2023 peak withdrawal season ended in late March with 1.830 trillion cubic feet in storage, the highest level since 2020, when stockpiles began to rise from the 1.986 tcf level. In June 2020, natural gas prices fell to the lowest level since 1995.
The trend remains lower
After trading to over $10 per MMBtu in August 2022, the U.S. natural gas futures prices collapsed.
The chart highlights the decline in the continuous U.S. Henry Hub natural gas futures contract, the benchmark for U.S. natural gas. The energy commodity plunged from $10.028 in August 2022 to $1.946 per MMBtu in April 2023, an 80.6% drop. Natural gas futures have made lower highs and lower lows since August 2022 and were sitting not far above the April 2023 low at below $2.20 on May 10.
No support from European prices
Over the past years, U.S. natural gas has become a more international commodity as LNG now travels worldwide via ocean vessels. In the past, U.S. natural gas was a domestic market limited to the North American pipeline network. These days, the energy commodity can move when prices in other regions rise and fall.
Russia’s February 2022 invasion of Ukraine caused European natural gas prices to spike higher on supply concerns. Europe depends on Russia’s natural gas supplies, and U.S. LNG cannot fill the void.
The chart illustrates that U.K. natural gas prices declined 90% from the March 2022 record peak.
Dutch natural gas prices fell 90% from the March 2022 all-time high. A warm winter season caused prices to fall, as the heating demand did not cause supply shortages. Plunging European natural gas prices weighed on U.S. prices.
The risk-reward dynamics favor the upside
The June 2020 low in NYMEX natural gas prices was a twenty-five-year bottom and began a rally that took the energy commodity to a fourteen-year high.
The long-term chart dating back to 1990, when the CME’s NYMEX division introduced Henry Hub natural gas futures, shows the bearish trend from the 2005 record peak to the June 2020 $1.44 per MMBtu low. A technical rally pushed the price above the November 2018 $4.929 high in September 2021, before Russia’s invasion and the deterioration of relations between Europe and its leading natural gas supplier. The war fueled the rally that took European natural gas futures to record peaks and U.S. futures to the highest price since 2008.
Natural gas has been hovering around the $2 per MMBtu level over the past weeks; at the end of the 2022/2023 peak demand season, inventories are significantly above last year’s level and the five-year average. Meanwhile, risk-reward dynamics favor a recovery after a drop from over $10 to the $2 level. However, the potential for even lower lows and a challenge of the June 2020 low is a clear and present danger. Trend-following suggests a continuation of lower lows, but the odds of a recovery increase the lower the price drops.
Tight stops and discipline are critical for success in the volatile natural gas futures arena
Any risk position in the U.S. natural gas arena, long or short, requires discipline and careful attention to risk-reward dynamics. The NYMEX futures market is the most direct route for trading and investment positions, but it involves significant leverage and margin requirements that exacerbate risks. Meanwhile, the United States Natural Gas Fund (UNG) is a highly liquid unleveraged ETF that moves higher and lower with NYMEX natural gas futures. The bullish Bloomberg Ultra Natural Gas 2X ETF (BOIL) rises and falls with the energy commodity, providing leverage to the price and UNG ETF. The bearish Bloomberg Ultrashort Natural Gas -2X ETF (KOLD) provides downside leverage when the U.S. natural gas price declines. BOIL and KOLD’s leverage involved time decay. When prices do not move in the anticipated direction or remain stable, BOIL and KOLD lose value and are subject to reverse splits that destroy value over time.
A long position is tempting at the $2 level, but as crude oil taught us in April 2020, a fall below zero on the nearby futures contract is not impossible. Natural gas is more volatile than crude oil, so anything is possible. The trend and U.S. inventory levels remain bearish, but the price level could attract buying as the war in Ukraine continues to rage, and European supply concerns could cause sudden rallies in the U.K. and Dutch natural gas futures markets.
Seasonal lows are likely over the coming weeks. The forward curve reflects higher prices during the 2023/2024 peak season.
The forward NYMEX natural gas futures curve shows that prices for January 2024 delivery are above the $3.70 per MMBtu level. The market expects a significant rebound from the continuous contract price.
Use price and time stops in natural gas, and do not fear taking small losses in the quest for significant gains.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
