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 NYMEX natural gas futures chart since the August high at just over the $10 per MMBtu level is ugly.
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.
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.
