Natural Gas: Is There a More Baffling Market Than This? 

From storage to weather, rig count and pricing, natural gas is a market for some of the most imaginative bets. And like any card game, the House will almost always have a better hand than yours, no matter your smarts.

The casino analogy somewhat explains what is probably the most beguiling energy trade now — regardless of the data, fundamentals, and animal spirits at work, getting the gas market to do your bidding is never easy.

On the contrary, it is more likely to do “its own thing” week after week, sometimes month after month. The clearest instance of this is the mid-$2 chokehold that we have seen applied to gas futures on the New York Mercantile Exchange’s Henry Hub since the year began. 

No matter the heat (Texas had a record bake almost the entire summer), no matter the power burns (consumption numbers were often off the charts on many weeks as Americans cranked their air-conditioners to the hilt), and no matter how sharp the decline in both gas and oil rigs (with the latter producing ‘associated gas’ as well), one had to be prepared to be surprised by the lack of any surprise in gas pricing.

And it’s not just longs in the game who were frustrated in their attempts to get the market to $3 and above (last week’s stray shot into that zone when the hub’s front-month reached $3.02 will be remembered for its anomaly).

Shorts were equally denied the opportunity to profit wildly with their dream of driving the market to $1 levels. 

In that sense, natural gas is probably the best equalizer out there among markets now. Its directionless state is the sum collective of individuals working to counteract one another, with only the most ‘deserving candidate’ getting a pass. 

It’s the exact opposite of oil, where a power-drunk organization like OPEC can hold an entire energy-consuming world hostage. 

This isn’t to say that Vladimir Putin can’t create his own parallel of an energy nightmare for Europe with gas. He has, of course, tried. But he has also failed, most memorably. That speaks volumes for the democratization of energy via gas. 

And it could stay that way for a while — at least mid-$2 pricing, that is. 

Charts by SKCharting.com, with data powered by Investing.com

Having corrected swiftly from the psychological $3 handle to reach $2.56, immediate momentum for gas was bearish, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Dixit said the four-hourly chart on the Henry Hub’s front-month contract, September, “maintains stability below the 50 EMA, or Exponential Moving Average, of  $2.71, as well as the confluence of the Simple Moving Average of 100 SMA at $2.68 and 200 SMA at $2.67 acting as challenging resistance.”

That doesn’t mean $3 pricing is not on the horizon at all, said Dixit.

“So long as the major support of 100 Day SMA of $2.44 is not violated on a daily/weekly closing basis, chances of resuming the uptrend remains intact,” he said. “Initial targets for this would be a retest of the swing high $3.01, followed by the 100 month SMA statically aligned with $3.24, followed by the 50-week EMA at $3.53.”

Enverus Intelligence Research also said that futures on the Henry Hub were likely to remain range-bound before winter potentially lifts them to a $3.50 high as the market awaits new LNG export capacity to incentivize higher prices, 

Forecaster NatGasWeather says the period beginning Sunday, or Aug. 20, through Aug. 25 is shaping up to be “near the strongest of the summer and of the past 40-plus years for this period, even after cooler overnight trends”. 

“But if the weather data trends further cooler for early next week, it clearly would be disappointing,” NatGasWeather said in a blog carried by industry portal naturalgasintel.com.

Traders have had to weigh an “impressively hot pattern” that will send national demand spiking next week against weak feed gas demand for LNG, or liquefied natural gas, and continued production strength, NatGasWeather added. 

The weather pattern offered enough heat to tighten the storage surplus in the Lower 48 U.S. states versus the five-year average to around 250 billion cubic feet, or bcf, with the potential to trend toward 200 bcf assuming “relatively hot” September conditions, the forecaster said.

Various analysts point to a recent decline in the cooling degree days, or CDDs, impacting the demand outlook for the second and third upcoming storage weeks. CDDs, used to estimate demand to cool homes and businesses, measure the number of degrees a day's average temperature is above 65 degrees Fahrenheit.

In a note to clients Wednesday, EBW Analytics Group analyst Eli Rubin said the market has been attempting to “rebalance in the wake of last week’s short squeeze-fueled rally.”

“Substantial weather-driven support is ebbing into the end of August,” Rubin said. “Although early next week could still flirt with CDD records, daily power sector gas burns may slump almost 4.0 bcf/d over the subsequent week at the same time that tropical threats increase.”

Meanwhile, production could recover over the next week or so from maintenance-related impacts to Northeast volumes, according to EBW’s Rubin.

“Although shorts may take profits to stem the bleeding, moderately lower prices at the front of the NYMEX curve are favored near-term,” Rubin added.

EIA analyst Jozef Lieskovsky, when asked how much further the tumble in rigs would impact production, said:

“I believe we may see the bottom of the rig count decline this month. Gas pipeline capacity is known  to add production … and with the expected demand and gas  pipeline capacity, the thing may turn around quickly.” 

EBW Analytics says that while production growth may stall out over the next 30-45 days, drillers have focused on maintaining “productive capacity” and may lift supply in early winter, particularly in the Northeast. As supply returns, NYMEX natural gas winter risk premiums may deflate into year-end absent a cold  start to the heating season.” EBW said.

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.