The natural gas market has been in recovery since it fell to a 25-year low in late March, when the start of lockdown restrictions to halt the spread of Covid-19 hit demand. Prices rose by more than 30 per cent from the March low to early May as oil production cuts began to take effect and reduced byproduct output of natural gas.
But the fundamentals for the commodity remain broadly negative in the near term, and the market has retreated in recent weeks. The latest dramatic price fluctuations have had investors wondering: “Are natural gas prices expected to rise or is this the time to sell short?”
Our natural gas analysis recaps recent developments in the natural gas market and considers the prospect for a natural gas price recovery in the near term. Scroll down for a video in which Capital.com’s chief market strategist David Jones looks at the technical moves in the market since March and outlines the short-term trading opportunity.
Natural gas news: weak demand, supply cuts lead to choppy trading
Natural gas prices are driven by consumption of the fuel for industrial, commercial and residential electricity supply, heating and cooking. Demand varies seasonally, and, typically, natural gas prices rise when consumption increases during the winter. Inventories are built up during the summer for use for heating in the following winter.
Gas prices are also influenced by the oil market, as gas is extracted along with crude oil. Changes to the demand and supply of oil have a knock-on effect on the production of gas.
The US natural gas price at the Henry Hub – the pipeline in the state of Louisiana that serves as the official delivery point for contracts on the New York Mercantile Exchange (NYMEX) – has seen choppy trading since March. The price rose to a three-month high above $2.13 per million British thermal units (MMBtu) in early May, as an explosion at Canadian energy company Enbridge’s Texas Eastern pipeline in the state of Kentucky reduced supply while demand ticked higher.
US gas production was already being cut as the negative turn in oil prices in April has prompted producers to curb output of oil and the gas that is extracted along with it. The US oil and gas drilling rig count has plunged to the lowest level since oil services company Baker Hughes began compiling the data in 1987, reaching 318 last week from 805 at the end of 2019.
But the gas market has since fallen back from the highs of early May. The market dropped to $1.60/MMBtu in mid-May, then fluctuated between $1.89/MMBtu and $1.68/MMBtu last week. The June futures contract on the NYMEX closed down by 4 per cent at $1.72/MMBtu on its last day as the front-month contract before expiry.
The news around the natural gas market remains bearish in the short term. There is talk of prices of natural gas in June 2020 turning negative in Europe on a lack of demand, plenty of supply and storage problems.
European gas storage is at 71 per cent of capacity, compared with the five-year average of 43 per cent in May, notes banking group ANZ’s senior commodity strategist Daniel Hynes. That, in turn, is set to further reduce US gas exports, which have fallen so far in May from a four-month low in April.
Coronavirus affects markets
Gas injections into storage are expected to rise in June to reduce some of the oversupply caused by the drop in exports, as US consumption remains subdued. Temperatures forecast for June are expected to cut residual demand for gas-fired heating, while industrial and commercial demand continues to be disrupted by closures related to Covid-19 lockdowns.
Watch our chief markets strategist, David Jones, discuss whether the recent recovery in the natural gas price is sustainable and use technical analysis to provide a trade setup for June.
Natural gas price analysis for June 2020: where to next?
While the near-term supply and demand outlook remains bearish, recent momentum suggests the negative news could already have been priced into the market. The most immediate support is between $1.68-1.80/MMBtu if the market is to continue building on the recent gains to test the $2/MMBtu level again and run up to year-to-date highs.
Analyst consensus points to a rise in the market over the longer term as industrial and commercial activity ramps up with Covid-19 lockdown restrictions easing and gas production cuts take effect.
“The number of active gas drilling rigs has been on a downward trend since early 2019,” notes Hans van Cleef, senior energy economist at ABN Amro. “Now that the production of gas as a byproduct of oil extraction has also come under pressure due to low oil prices, we expect the market in the US to rebalance quickly. That should ease some of the downward price pressure.”
Van Cleef sees the natural gas price going up in the coming months, averaging $2/MMBtu in June-September.
The US Energy Information Administration (EIA) “expects domestic consumption of natural gas in 2020 will fall 3.4 billion cubic feet per day (Bcf/d) compared with 2019, led by a 1.6 Bcf/d decline in industrial natural gas consumption. EIA forecasts lower overall US consumption in 2020 because of reduced economic activity related to the impact of the 2019 novel coronavirus disease (Covid-19) and milder-than-normal temperatures in the first quarter of 2020 that reduced demand for space heating in buildings.”
The EIA expects a natural gas price increase in the coming months, forecasting the Henry Hub spot price to “increase from $1.88 per million British thermal units (MMBtu) in May 2020 to $2.94/MMBtu in December 2020,” although that is revised down from a natural gas price forecast of $3.12/MMBtu by December a month ago.
“Our projections looking forward for the weeks ahead by our Implied Forward Demand Index show an increase in supply relative to the current values, however we can likely expect tightness to be maintained as demand increases, said broker firm Marex Spectron.
“As the US slowly opens up from lockdown and starts to increase economic activity, we are seeing improvements to our Energy Intensity index. We expect these improvements will continue in the coming weeks.”
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