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As Natural Gas Hits Unseasonally High Levels, Don’t Expect It To Turn Back

By Andy HechtCommoditiesApr 29, 2022 18:30
As Natural Gas Hits Unseasonally High Levels, Don’t Expect It To Turn Back
By Andy Hecht   |  Apr 29, 2022 18:30
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  • Quite a rally since June 2020
  • US natural gas market matured
  • Increased exposure to international price trends
  • Europe is now central issue for natural gas
  • We could see return to 2005 or 2008 prices in 2022-23

Natural gas is a highly volatile commodity that trades on the CME’s NYMEX division. Historically, the fossil fuel's price peaks as the winter season approaches and heating demand increases. From November through March, the coldest months, the stockpiles tend to decline. The injection season is when inventories build, usually in late March, and runs through early November. The price action has typically followed the inventory cycles.

The US natural gas market underwent significant changes, transforming from a purely domestic to a more international market as technology allowed for the energy commodities exportation to other areas worldwide. The shift substantially impacted natural gas’s price dynamics.

Quite A Rally Since June 2020

At $1.44 per MMBtu in June 2020, natural gas futures fell to the lowest level since 1995, not far from the 1991 all-time bottom at $1.04 per MMBtu. In commodities, the cure for low prices is lower prices.

Long-Term Natural Gas Chart.
Long-Term Natural Gas Chart.

Source: Barchart

Natural gas started trading on the CME's NYMEX in 1990. As the long-term chart dating back to 1990 shows, the energy commodity’s price moved from a 25-year low to a 14-year high in less than two years. The latest high was at $8.065 per MMBtu on Apr. 18 for the May contract. The active month June natural gas futures contract rose to $8.197 per MMBtu.

The cure for the low price was the low price, but the bullish stars lined up for US natural gas, a market that had undergone significant changes over the past years.

US Natural Gas Market Matured

Discoveries of quadrillions of cubic feet of natural gas reserves in the US Marcellus and Utica shale regions caused the price to make lower highs and lower lows for a decade and a half. Moreover, technological advances in fracking reduced the cost and improved the efficiency of extracting the energy commodity from the Earth’s crust.

Natural Gas Chart.
Natural Gas Chart.

Source: Barchart

The chart illustrates the bearish pattern from the 2005 record peak of $15.78 to the June 2020 bottom of $1.44.

As necessity is the mother of invention, new demand verticals appeared as supplies rose. Natural gas replaced coal in US energy generation. Meanwhile, technology also impacted the demand side, as processing gas into liquid expanded the addressable market for US gas supplies.

The NYMEX price is a benchmark based on the level at the delivery point at the Henry Hub in Erath, Louisiana. Over the past decades, natural gas was purely a domestic North American energy market, with distribution limited by the pipeline network. Liquefication dramatically changed the fossil fuel, leading to the most recent rally to a 14-year high and ending the bear market that had pushed prices lower from 2005 through 2020.

Increased Exposure To International Price Trends

Liquified US natural gas began traveling the world by ocean vessels to regions where the price was far higher than in the US. Natural gas was trading at multiples of US prices in Asia, making for an attractive export destination. Natural gas exporters, like Cheniere Energy (NYSE:LNG) had sold the energy commodity to Asian consumers for decades into the future.

Meanwhile, while Asia bought natural gas from the US, European consumers continued to rely on Russian supplies. In early 2022, Russia’s invasion of Ukraine created a substantial shift in natural gas supply and demand fundamentals. While sanctions have not touched Russian supplies, the Russians are now demanding payment in rubles. Moreover, European consumers and NATO members are scrambling to replace Russian natural gas with alternative sources.

The first major war in Europe caused the energy commodity’s price to explode.

Long-Term ICE UK Natural Gas Chart.
Long-Term ICE UK Natural Gas Chart.

Source: Barchart

The chart of ICE UK Natural Gas futures shows the move to a record $800 in March. The price corrected to the $153.39 level on Apr. 27 but was still above the pre-2021 record $117 high.

Increased exposure to international supply and demand fundamentals has pushed US natural gas futures to multi-year highs in 2022.

Europe Is Now Central Issue For Natural Gas

The future events in Europe are critical for the path of least resistance of the volatile natural gas futures market. The Biden administration has already pressured US exporters, like Cheniere, to redirect supplies from Asia to Europe to reduce the dependence on Russian supplies. Moreover, Russia could ban natural gas exports to “unfriendly” countries as it has in the fertilizer market.

Europe got too comfortable with Russian flows despite signs that aggression toward Ukraine and NATO. European and American consumers will pay a steep price for the fundamental change in the energy commodity. Over the past week, the Russians took the first step, banning natural gas exports to Poland.

We Could See Return To 2005 Or 2008 Prices In 2022-23

The all-time high in natural gas came in 2005 when it hit $15.78 per MMBtu. In 2008, the price rose to a lower high of $13.684. The weather, instead of geopolitics, caused the 2005 and 2008 price spikes as Hurricanes Rita and Katrina caused devastation along the Gulf Coast and at the Henry Hub in Erath, Louisiana.

In 2022, geopolitics has boosted natural gas prices as the US market expanded its horizons beyond the pipeline network. The Biden administration had been addressing climate change with stricter regulations on fossil fuel production, making supplies decline as the demand was robust. The almost perfect bullish storm in natural gas caused the price to probe above $8 per MMBtu at the end of the 2021/2022 withdrawal season, a typically weak time for prices. There is nothing ordinary about 2022, and the volatile natural gas market remains in a bullish trend with lots of price variance at just below $7 on the June futures contract on Apr. 27.

We are now moving into the 2022 hurricane season, and any storms that impact natural gas production, infrastructure, or logistical hubs could send futures prices back to 2005 or 2008 levels or higher.

After a 15-year bear market in natural gas ended in June 2020, the bull is roaring in the energy commodity. Natural gas is unseasonally high in April 2022. But if the price action in Europe and Asia is a guide, US prices could have lots of upside potential at the $7.30-per-MMBtu level on Apr. 27. However, the price action will likely be a wild and volatile ride with lots of two-way action.

After the end of the annual peak season for demand, natural gas prices tend to experience selling pressure. Meanwhile, 2022 is anything but a typical year, and the price is unseasonally high as we head into May.

As Natural Gas Hits Unseasonally High Levels, Don’t Expect It To Turn Back

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As Natural Gas Hits Unseasonally High Levels, Don’t Expect It To Turn Back

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