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Natural Gas: Will $3 Support Give Way to Merciless Winter Warmth?

Published 01/12/2023, 04:25 AM
Updated 08/14/2023, 06:57 AM
  • Hope appears to have become an exercise in futility for gas bulls, with 50% of market value erased in 4 weeks
  • 'King Weather' suggests $3 support for US gas could be broken next
  • Still, technicals assign little chance now of visiting $2 levels last seen in May 2021

Since December began, hope has been an exercise in futility for natural gas bulls. With almost 50% of the market's value erased in just four weeks and one support after another being taken out, the time has come to ask if the $3 level can hold.

It's incredible how we had gotten here and how quickly too.

Just in August, gas futures on the New York Mercantile Exchange's Henry Hub were at 14-year highs of $10 per mmBtu, or million metric British thermal units. Even with December's meltdown, the hub's front-month contract managed to pop above $7 at one point.

Since then, the sheer intensity of the downside — with 25- to 45-cent drops becoming acceptable daily occurrences — has raised questions on where it might end.

The answer, of course, lies within the cold and warm temperatures playing out across the United States, as the weather is king in this market.

After explosive upward price action for most of 2022 from weather extremities and a supply squeeze caused by political and other disruptions to Russian gas output in the aftermath of the Ukraine invasion, natural gas futures suddenly collapsed last month. The change has primarily been attributed to unseasonably warm winter temperatures that have left the US and European heating markets sufficiently supplied.

Exports of LNG, or liquefied natural gas, have also been tamped down since June with the shutdown of the Freeport liquefaction facility in Texas, which has idled about 2 bcf, or billion cubic feet, of gas per day. That is independent of what's happening on the weather front.

And what weather forecasters are saying isn't what gas bulls want to hear.

Other than a transient burst of chilly temperatures aimed at the Southeast region of the United States this coming weekend, overall mild temperatures don't look to change until at least January 22. That's the consensus of forecasters.

That means it will be another ten days before the longer-range weather models expect a resumption of the bitterly cold Arctic winds that are typical at this time of the year. Once in place, the continuation of that winter weather may linger well into February throughout the central and eastern regions of the country.

But we must cross ten days before getting to those "real winter" conditions. And ten days is an awfully long time in a merciless market like natty, which is the pet name for the trade. 

At each stage of its crumble — from $7 to below $6, then under $5 and sub-$4 — gas longs on the Henry Hub had prayed for the situation to reverse. However, as said at the outset, it has been an exercise in futility thus far due to the weather.

Natural Gas Daily Chart

The start of the 2022/23 winter season has been marked by abnormally high temperatures, with the daily average over the past week at around 55-45 degrees Fahrenheit (13 to 7 Celsius) as opposed to the 35-25 degree Fahrenheit range (around 2 to -2 Celsius) common for this time of year.

This January "is on pace to be among the warmest in nearly two decades," Eli Rubin, senior analyst at EBW AnalyticsGroup, said in comments carried by naturalgasintel.com.

On a seasonal basis, temperatures were "scorching," and the "extent of near-term warming has slashed seasonal supply adequacy fears and [US gas] risk premiums may struggle" more in coming days, Rubin warned.

A somewhat similar situation is playing out across Europe, where early fall-like temperatures (some outrightly call them summer conditions) are running riot across the continent, capping European gas prices on the Netherlands' TTF point at $21-$24 per mmBtu lately — a far cry from the $80-$100 range seen during the 2022 summer.

Back to US gas pricing: Will the $3 support be defended? Or will we see $2 levels, which had not been witnessed since May 2021, some 20 months ago?

At the current rate of attrition, the 77-cent buffer — which currently holds the psychological $3 support — could get wiped out by Friday.

But the weather isn't the only determinant for gas prices. Chart-based trading is also a factor, though not as much as in oil and other energy-based commodities.

Technicals can accentuate or skew a trading trend already in place in gas. But there are also occasions when technicals break out on their own, particularly when a trend is a near exhaustion. After four weeks of selling, many think gas may have reached that point.

Based on current chart patterns in US gas, the bulls may actually be in luck, as several support points appear to hold the market at above $3, says Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Adds the chartist:

"The probability for $2 pricing is quite low for now, from a technical perspective. At the most, I see the current bearish streak extending to the 100-Month Simple Moving Average of $3.29, if we take another leg lower from Wednesday's low of $3.42.

Otherwise, the weekly chart suggests a potentially bullish double bottom formation, which will, of course, require confirmation from price action reversal.

If gas rebounds from those support areas and makes a sustained break above $3.77, followed by $4.17, we'll get that confirmation. At that point, the rebound targets will be $4.77 and $5.67."

Also, amid the deep red trading conditions on the Henry Hub, market participants are bracing for another weekly update from the US Energy Information Administration on inventories in the national gas storage.

Gas storage numbers over the past two weeks have shown withdrawals exceeding 200 bcf each week. While under normal circumstances, that would be considered rather bullish, draw expectations have also been set higher this winter due to abnormally warm temperatures.

Gelber & Associates, a Houston-based energy trading consultancy, said in a note on Wednesday to its clients in natural gas:

"Once the calendar reaches the middle of the winter season and gas storage inventories are well situated and supplied, it [will] become evident that there will not likely be a storage crunch and any upward trajectory in prices, even in the midst of lots of Polar-chilled air, [will] start to wane."

Disclaimer: Barani Krishnan 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. He does not hold positions in the commodities and securities he writes about.

Latest comments

Barani I respect your opinions but you must know that these weather forecasts are a big sham and total lie. Its bone chilling cold in northern and eastern USA. This is collusion between the big hedge fund and the meterologists to create fear in investors and suck out their life savings.
THIS IS TRUE!!! I WAS HAVING BREAKFAST WITH THE METEOROLOGISTS AT SHONEYS IN CHEYENNE (GREAT TURKEY BACON) AND IN WALKS BIG FOOT (CODE NAME, BUT YOU KNOW WHO I MEAN). HE POINTED HIS FINGER AT US AND SAID THE BIG HEDGE FUND WANTS FORECASTS OF WARMER WEATHER. THEY ALL AGREED TO DO IT FOR A SECOND HELPING OF WAFFLES.
Bubble definitely burst, old gap 2.75 and recent gap 4.44 should be price range for awhile lol
what a contra indicator haha
Here's a guy who's been trying his best to slag me, yet misses big time on each attempt because he doesn't read anything beyond the headline. Had he read the story itself, he'd have seen the entire range of today's price action covered in full (courtesy of Sunil Kumar Dixit, my chartist). Try harder, "Ashish" . Advice: Just assuming Mittal jee's avatar doesn't make you as intelligent as him. LOL!
Barani, keep writing your articles on commodities are always appreciated !
Thanks much!
if he is saying below 3 then just buy for above 4 haha.
I read that many EU countries' gas storage has been going up instead of down during this winter.
You read correctly, First Last.
they say "prices are set on the margin", and commodities, short term, are mostly driven by inelastic factors on both supply and demand sides.  Speculate at your own risk, it'll spike both ways.  WTI crude was below zero at one point in 2020 ... would have been a good day to have storage to fill.
Dont think it will break 3. Not at this period. But if it does, i will sell wife and kids to move all in.
You're lucky ... my chartist Dixit is right thus far about support above $3.40 :)
ယူ
merci
nice
Thanks, Marcos.
The widow maker 🕷the big boy have massive orders at 3.00 👌🤙💪✊👏
Yup, Jay. The widow maker has made many "widows" of bulls' partners this winter. LOL
Greta article again... hope for bottom formation!
Thanks Dalibor. But do watch Sunil Kumar Dixit's technical calls. It's working out as he says for now.
money
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