UNL - Natural Gas Has Finally Bottomed The Time To Buy Is Now

2023-04-24 12:34:18 ET

Summary

• Technically, natural gas looks bullish.
• Next week (ending Apr. 28), the weather conditions are expected to continue to cool down.
• If production remains flat, it will be down in annual terms by September this year due to base effects.
• Although U.S. natural gas storage surplus is still projected to expand, it may not even be the most important price driver.
• The European natural gas storage surplus has been shrinking since January.

Technical Overview

Front-month natural gas futures for May delivery (NGK3) on the New York Mercantile Exchange (NYMEX) rose 5.63% last week (ending April 21). It was the second consecutive weekly rise and the largest weekly increase since March 3, 2023.

The largest daily increase was recorded on Monday, April 17, when natgas futures jumped by more than 7% on forecasts for cooler weather and more heating demand over the next two weeks than previously expected. However, the weather forecast is inherently unstable and therefore, when it turned less bullish on Wednesday, the prices fell.

Still, technically, natural gas looks bullish. On a daily timeframe, the bearish trend, which has been in place this year, has been broken and natural gas now seems to be trading within a well-defined ascending parallel channel (see the chart below). 14-day Relative Strength Index ((RSI)) shows upward momentum and $2.14 continues to act as a relatively strong support level. In fact, only a drop below $2.10 will invalidate the underlying bullish trend and only a drop below $1.95 would mean that a new bearish trend is in the making. I believe that both scenarios are unlikely. Conversely, I believe that in the mid-term, natural gas will probably re-test the $2.400 level and bulls will then attempt to break above it and consolidate higher. However, a move above $2.600 would require an additional fundamental impetus, such as a more bullish weather forecast or a drop in production.

Fundamentals

In the week ending April 14, the weather-induced energy demand was rather bearish (see the chart below), yet natural gas price declined only marginally and continued to trade above the $1.95 level.

Next week (ending Apr. 28), the weather conditions are expected to continue to cool down. On Sunday, April 23, the latest numerical weather prediction models (GFS 12z Ensemble and ECMWF 12z Ensemble) showed that the number of nationwide heating degree days (HDDs) would rise by 26% w-o-w (from 62 to 78). In annual terms, the total "energy demand" (measured in TDDs) should increase by 12% y-o-y. The deviation from the norm will turn positive for the first time since April 7 (see the chart below).

If the latest short-range weather forecast remains unchanged, then the daily consumption of natural gas (in the contiguous United States) should average around 76.7 bcf/d over the next two weeks. Total demand (which includes consumption and exports) should average around 98.4 bcf/d over the same period.

The bad news (for bulls) is that in annual terms, the total supply (which includes production and exports) continues to grow faster than the total demand (see the chart below). Still, the gap between supply and demand growth is not as large as it was back in January and February. Furthermore, supply growth is actually slowing down.

As of today (Sunday, April 23), dry natural gas production in the contiguous United States is estimated at 100.6 bcf/d (-1.9 bcf/d from an all-time high reached in December of last year). In case production remains flat, it will decline in annual terms by September this year due to base effects (see the chart below). Concurrently, natural gas consumption is likely to remain elevated - specifically, due to a very high level of coal-to-gas-switching.

Conclusion

Although the technical picture for natural gas appears to be bullish, the fundamentals are somewhat mixed. Supply is still strong, but total demand is declining and is yet to reach a seasonal bottom. U.S. natural gas storage surplus is still projected to expand. For example, the surplus vs. last year is currently projected to expand by 150 bcf over the next six weeks (from +488 bcf today to +638 bcf on June 2).

However, U.S. national supply-demand balance is not the only factor influencing the price of natural gas. In fact, it may not even be the most important one. The geopolitics of natural gas has changed entirely since the war broke out between Russia and Ukraine. The European demand for U.S. LNG is now equally important to consider. And here the picture does not look to be particularly bearish. The European natural gas storage surplus has been shrinking since January and the local price ((TTF)) has stopped falling.

Overall, I remain cautiously bullish on U.S. natural gas. I am long June contract and I will certainly consider increasing my long exposure - especially if we see a correction into the $2.150-2.100 range.

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