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March 29, 2023
By
Andrew Hecht
Why Are U.S.
Natural Gas Futures So Low?
Natural gas
futures are as volatile as the raw commodity when extracted from the
earth’s crust. Since 1990, NYMEX natural gas futures for delivery at
the Henry Hub pipeline in Erath, Louisiana, have experienced periodic
explosive and implosive price moves.
The U.S. natural
gas futures arena
had been in a bearish trend of lower highs and lower lows from 2005,
when the price reached a record $15.78 high, through June 2020, when
it traded to a quarter-of-a-century $1.44 low. It took a little over
two years for the price to explode to the highest price since 2008 but
six months to fall below $2.
On February 7,
2023, I highlighted that natural gas had no inventory or supply
concerns on Barchart,
with the price of nearby NYMEX futures sitting around the $2.50 per
MMBtu level. In that article, I pointed out natural gas stocks were
sitting 9.4% above the previous year and 6.7% above the five-year
average as of February 2.
In late March
2023, the inventory situation worsened for anyone bullish on the
energy commodity. However, natural gas is at a price that may not have
too much more downside.
Inventories at a high level compared to the past years
The latest Energy
Information Administration natural gas stockpile data shows that
natural gas inventories have exploded to the highest level in years.
Source: EIA
The chart highlights that natural gas in storage across the U.S. stood
at 1.9 trillion cubic feet for the week ending on March 17, 2023. The
stocks were 36.1% higher than in mid-March 2022 and 22.7% over the
five-year average.
The 2023 injection season begins soon
Typically, the withdrawal season in natural gas ends, and the
injection season starts in late March annually. Over the past years,
natural gas stockpiles were at the following levels at the end of the
peak withdrawal season:
2022- 1.382 trillion cubic feet
2021- 1.750 trillion cubic feet
2020- 1.986 trillion cubic feet
2019- 1.107 trillion cubic feet
At the 1.900 tcf level on March 17, natural gas stocks were
below the 2020 level but will likely end the 2023 withdrawal season
above the levels in 2021, 2022, and 2019.
As of the week ending on March 24, 2023, Baker Hughes reported
that 162 natural gas rigs were operating in the United States, 25 rigs
above the level at the same time in 2022. The bottom line is plenty of
natural gas is in storage to meet requirements, and production running
at a higher level than last year, with 25 more rigs extracting natural
gas from the earth’s crust in March 2023 than in March 2022, which
remains bearish.
Natural gas is inexpensive, which does not mean it will not get
cheaper
The chart shows
the steady plunge from the August 2022 $10.028 high to the $1.967 per
MMBtu low in February 2023. At the $2 level on the continuous futures
contract on March 29, natural gas remains near the recent low, and the
trend remains bearish. The trend is always your best friend, and while
it remains bearish, natural gas for delivery at the Henry Hub pipeline
in Erath, Louisiana is at $2 per MMBtu, meaning after a nearly $8 drop
over the past seven months, a continuation could threaten the
twenty-five year low, the all-time bottom since 1990, and even zero, a
level we saw breached in the nearby NYMEX
crude oil futures in
April 2020.
Natural gas may be
cheap at $2 per MMBtu on the nearby April contract on March 29, but a
continuation of the price decline is not out of the question.
Europe and the U.S. dodged a bullet over the past months- Futures do
not reflect consumer prices
U.S. NYMEX natural
gas rallied to a fourteen-year high at over $10 per MMBtu in August
2022 as the war in Ukraine pushed U.K. and Dutch natural gas futures
to record highs last year.
The chart shows
the record peak in U.K. natural gas prices in March 2022 and the
steady decline over the past year.
The chart of
natural gas futures in the Netherlands shows the same bearish pattern
since the March 2022 all-time high.
While Russia has
used natural gas exports as an economic weapon against Western
European countries supporting Ukraine, an unseasonably warm winter
prevented shortages and sent prices lower. As LNG flows from the U.S.
to other worldwide consumers, U.S. natural gas inventories have risen,
and prices have declined over the past months.
The technical levels to watch in NYMEX natural gas
U.S. Henry Hub
NYMEX natural gas futures tend to peak during the late fall and early
winter months, while the energy commodity often falls to bottoms
during the spring. In June 2020, nearby futures fell to the $1.44 per
MMBtu level, the lowest price in twenty-five years since 1995. The
recent $1.967 low stands as short-term technical support, with the
June 2020 $1.44 low as the critical downside target during the current
bearish trend.
The long-term
chart shows
the all-time low in U.S. natural gas futures since 1990 was at the
$1.04 per MMBtu level in early 1992. However, crude oil’s example in
2020 is a warning that the downside is not limited to the $1.04 or
even zero level.
On the upside,
technical resistance is just below the $3.40 per MMBtu level, the
October and November 2020 highs. As the war in Ukraine continues, the
potential for sudden rallies remains a clear and present danger for
the energy commodity. The price action in nearby U.K. and Dutch
natural gas futures could guide U.S. prices, as rallies will cause a
sudden increase in U.S. LNG export demand.
One thing to
remember is that U.S. natural gas futures only reflect the delivery
price at the Henry Hub pipeline. Depending on local supply and demand
factors, regional prices can be much higher or lower. In Las Vegas, my
monthly gas bill remains five times the level as in previous years,
even though the NYMEX futures price dropped around 80%. I hope the low
futures prices filter through and lower my bills, but there is no
guarantee that will occur.
More Energy
News from
Barchart
On 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 solely for informational purposes. For more
information please view the Barchart Disclosure Policy here.
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
www.exactrix.com
509 995 1879 cell, Pacific.
exactrix@exactrix.com
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