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Dr. Ken Rietz April 26, 2024 |
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Crude oil prices are closely tied to politics, which means that lately, they have been unpredictable and fast moving. Natural gas, on the other hand, is much more globally available and abundant. Therefore, it does not suffer nearly the correlation with political temperament. This week, we will look at natural gas prices, both from a fundamental and technical perspective. But first, here is the graph of NYMEX front month futures for the past several years. |
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Figure 1: The NYMEX front month natural gas futures, in USD per million BTU |
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We begin with an overall analysis. In 2022, as the graph shows, the price of natural gas rose dramatically. According to the EIA, most of the increase was due to weather, and only some was due to politics, namely urgently-needed LNG shipments to Europe. That is certainly not what might be expected, but it bears up to scrutiny. What was the reaction of the natural gas futures market to the beginning of the Ukraine war? On the interval from two business days before to after the initial invasion on 24 February, 2022, the front month NYMEX futures market closed at 4.498, 4.623, 4.567, 4.470, and 4.408. It is clear that there was no serious deviation from typical values then. The chart above shows the same. The natural gas aspect of the war was at best a background issue, until the destruction of the Nord Stream pipelines on 26 September, 2022. Again, the two business days before to after that date had the front month NYMEX futures contracts on natural gas closing at 7.089, 6.828, 6.903, 6.687, and 6.868. That shows no obvious deviation from the regular price movement. The chart above shows that the prices were in a downtrend at the time and continued that trend after the explosion. It appears that the EIA is correct in discounting the Ukrainian war as a factor influencing the price of NYMEX natural gas in 2022, except for an upturn in prices due to large shipments of LNG to Europe as noted earlier. Since 2022, the price of NYMEX natural gas has settled down, despite the ongoing war. In early February of this year, the price dropped below US$2.00 and has stayed there, despite the major political events of the past few months. The technical analysis of the price of natural gas indicates that it has settled into a horizontal channel. There are upper resistance levels at 1.90 and a major psychological resistance at 2.00, and a strong lower resistance level at about 1.65. This condition is often called consolidation. Neither the bulls not the bears are aggressively attempting to move the market, nor is there any exogenous catalyst either up or down. All that, of course, is subject to change, and the longer natural gas consolidates, the more likely it is to move faster and further when it does break out of the channel. But until that happens, natural gas prices should stay roughly at this level. The fundamental analysis gives much the same predictions. The EIA Weekly report showed that prices in the US dropped some overall, although international (East Asia and Netherlands) LNG prices did increase a bit the past week, but both are quite a bit down year-over-year. The working underground storage of natural gas is above the maximum amount in storage during the interval 2019–2023, though the weekly production was a bit below normal. This bodes well for a moderation in the price movement for natural gas. In a longer-term perspective, the EIA reports that the US set monthly and annual usage records throughout 2023, albeit sometimes just barely a record. Where will the price of natural gas go? All indications are that the price of natural gas is most likely to drift downward slowly due to slowly increasing storage. At some point, it will break out, either up or down, and start trending again, probably for a month or more, as it has in the recent past. This market is for investors, and not much for traders. Traders can find all the volatility that they want in the crude oil market. |