Natural gas rally continues after 17% weekly gains

The price of natural gas is still rising following one of the best weeks of 2023, which saw a 17% increase. After disruptions in Norway, the continent’s primary producer, there are still doubts over whether European supply can keep up with demand.

Despite strong fundamentals, as long as prices are below $3.079 MMBtu, the longer-term technical trend is negative. On the heels of a robust surge last week, the price of natural gas is trading roughly 2% higher on Monday. The positive short-term momentum continues despite US traders remaining away from their desks for the Juneteenth vacation.

One of the greatest spikes in 2023 occurred last week, with natural gas prices increasing by over 17%. Fears over supplies were the main driver, as several European Gas facilities experienced longer-than-expected outages, raising worries about a repetition of last year’s supply crisis brought on by Russia’s invasion of Ukraine. Unexpectedly hot weather also increased demand for air cooling.

At the time of writing, XNG/USD is trading somewhat higher compared to yesterday, changing trades at $2.739 MMBtu.  Natural gas price continues higher with the main catalyst the news of longer-than-expected outages at Norwegian Gas plants, plus rumors of an earlier-than-expected closure of the Groningen Gas field in the Netherlands.

After Norway displaced Russia as the primary supplier in 2022, when Norwegian Gas accounted for 23% of imports compared to Russia’s 15%, Norwegian supply is now crucial to the European continent. One billion cubic metres (bcm) of gas could be lost due to the prolonged suspension of Norwegian facilities, and it only really takes 5 bcm less… to make the market a lot tighter.

In terms of properly balancing supply and demand, the European gas market, and by extension the world gas market, [is] unquestionably not out of the woods. The situation is less unstable than in past years: Storage facilities in Europe are currently 73% full, which is substantially higher than the 56% average for the same time of year for the previous five years.

Japan and South Korea reported considerably greater stores and the Chinese economy continues to deteriorate following months of lockdown, there is also expected to be less Asian competition for Europe’s limited supplies this year than in years past. The Western Hemisphere’s hotter-than-expected summer weather has increased demand for air conditioning.

Demand in the US might rise even more as a result of the present Atlantic storm season. According to last week’s Energy Information Administration (EIA) figures, supply unexpectedly declined, falling to 84 billion cubic feet (Bcf) from the predicted 95 Bcf and the 104 Bcf of the previous period, worsening supply-demand imbalances.  

As market estimates about the trajectory of upcoming interest rate changes in the US conflict with statements from US Federal Reserve (Fed) officials, the US Dollar could be a factor for XNG/USD.

Fed speakers, Jerome Powell included, are taking a more hawkish line than market-based gauges suggest, with Powell recently mentioning the chance of two more hikes in 2023 when the market only expects one. Increases in interest rates are positive for the US dollar (negative for XNG/USD), as more foreign investors park their funds in the US to earn the highest returns.

Since turning lower at the $9.960 MMBtu peak reached in August 2022, the price of natural gas has been in a long-term downward trend. That being said, since February 2023, the momentum for the bears has significantly diminished. This is demonstrated by the price and the Relative Strength Index (RSI) momentum indicator’s positive convergence since May of this year. When the price makes new lows but the RSI doesn’t follow, there is bullish convergence. It can be a sign that a bullish turn is about to occur.

Natural Gas would need to break above the latest lower high of the long-term downtrend at $3.079 MMBtu in order to break the trend, given the longer-term trend is bearish. Currently, a break below the year-to-date lows of $2.110 MMBtu would imply a continuation down to a target of $1.546 MMBtu. This goal is the height of the broadly horizontal consolidation range that has developed during 2023, which is the 61.8% Fibonacci extension.