On January 9, 2024, in a Barchart article that asked if US natural gas futures could continue to rise in 2024, I wrote:
Natural gas goes into 2024 in the same bearish trend since the peak of August 2022. However, the price has decreased to a level that favored the top in 2024, causing a seasonal accumulation to more than $3.20 per MMBtu in early January. The weather over the coming weeks will dictate the path of the energy commodity of least resistance.
The rally took US NYMEX March natural gas futures prices to a high of $2.791 per MMBtu on January 9, while the continuous contract rose to $3.392 per MMBtu. Natural gas futures underperformed and came close to testing the $2 level on February 7.
Natural gas fails
NYMEX US natural gas futures for March delivery at the Henry Hub in Erath, Louisiana, were in a bearish trend in 2023 and 2024.
The short-term chart highlights the significant decline over the past few months, which took March natural gas futures to a low of $1.997 per MMBtu on February 6.
The ten-year chart illustrates that natural gas is headed for a test of the April 2023 low of $1,946.
The energy commodity rose to $3,392 on the continuous contract in January 2024 as cold weather gripped the United States. The bullish price action failed, sending March futures to just below the $2 per MMBtu level in early February.
The end of the peak season is on the horizon
Each year, the peak season for natural gas demand runs from late November to March when heating demand soars. In early February, only weeks remain until withdrawals from natural gas storage become injections. Natural gas prices tend to peak as winter approaches and reach seasonal lows during the injection season.
While there are still cold weeks on the horizon, plenty of natural gas is stored across the US to meet any heating demand levels.
Inventories have decreased but remain higher than in previous years
The amount of natural gas in storage across the United States remained above last year’s level and the five-year average during the 2023/2024 peak season.
Source: EIA
As the chart shows, at 2.659 trillion cubic feet for the week ending January 26, 2024, natural gas inventories were 2.1% above last year’s level and 5.1% above the five-year average for the end of January. Over the past two weeks, natural gas supplies have experienced significant declines, falling 326 billion cubic feet for the week ending January 19 and 197 bcf for the week ending January 26. While cold temperatures have increased heating demand and the amount in storage has decreased, it remains comfortably above levels for the past few years.
The withdrawal season in 2022/2023 ended with 1,830 tcf in storage in March 2023. The level of natural gas across the United States will likely be higher in March when natural gas begins to flow into storage at the start of the 2024 injection season.
The bullish case for 2024
The factors that could support natural gas prices over the coming months include:
- Natural gas futures are at a low level at around $2 per MMBtu. Technical support stands at $1.946, the April 2023 low, and $1.44, the June 2020 bottom and the lowest price since 1995.
- The bearish trend means that many trend-following traders are short the energy commodity. When an overwhelming number of speculative traders carry short positions, the potential for a sudden recovery is high.
- The ongoing war in Ukraine could affect European natural gas prices over the coming months as Western Europe depends on Russian pipelines for supplies. Because U.S. natural gas travels worldwide in liquid form, any sudden increase in European prices due to supply fears could cause U.S. prices to rise. Nearby US prices rose to more than $10 per MMBtu in August 2022 on European supply fears.
- According to Baker Hughes, the number of North American operating natural gas platforms as of February 2 was 117, which is 41 lower than the previous year. Fewer rigs means less natural gas production.
Although many factors could recover from US natural gas futures, the trend remains bearish in February 2024.
The bearish case for the coming months
The bearish case for natural gas includes:
- The 2023/2024 retreat season ends in March. As natural gas begins to flow into storage, prices tend to move lower.
- While technical support stands at the lows of $1.946 and $1.44, natural gas prices could fall to lower levels. If we have learned anything from the energy markets over the past few years, the downside is not limited to zero. Nearby NYMEX WTI crude oil futures fell below zero to negative $40.32 per barrel in April 2020 during the delivery period of the contract as longs had nowhere to store the oil. Natural gas could suffer a similar fate if storage capacity does not allow for deliveries during the 2024 injection season.
- The trend is always your best friend in all markets, and it remains significantly bearish in the US natural gas futures arena for delivery at the Henry Hub.
Natural gas is a volatile energy commodity that tends to take no prisoners when it decides to move higher or lower. One of the most significant factors for the path of least resistance of prices is if the market becomes too long or short. In February 2024, speculators are short. The extent of these risky positions could determine the path of least resistance of prices and if the energy commodity could stage a large rally during the coming weeks and months.
Natural gas’s propensity for price variance means that all risky positions require a plan with risk-reward horizons. While changing the dynamics of the plan when natural gas prices move in the predicted direction is acceptable, adjust stops to protect profits and capital. When the move is against expectations, take your balls and start over, because a small loss is much better than a catastrophic one.
More Energy News from Barchart
As of 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 for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.