Natural Gas: Ugly Price Action- How Low Can Natty Gas Go?

On January 9, 2024, in a Barchart article that asked if U.S. natural gas futures can continue to rally in 2024, I wrote:

Natural gas is going into 2024 in the same bearish trend since the August 2022 high. However, the price had declined to a level that favored the upside in 2024, causing a seasonal rally to over $3.20 per MMBtu in early January. The weather over the coming weeks will dictate the energy commodity’s path of least resistance.

The rally took U.S. NYMEX March natural gas futures prices to a $2.791 per MMBtu high on January 9, while the continuous contract rose to $3.392 per MMBtu. Natural gas futures failed to follow through on the upside and were approaching a test of the $2 level on February 7.

Natural gas fails

NYMEX U.S. natural gas futures for March delivery at the Henry Hub in Erath, Louisiana, have been in a bearish trend in 2023 and 2024. 

The short-term chart highlights the significant decline over the past months that took March natural gas futures to a $1.997 per MMBtu low on February 6.

The ten-year chart illustrates that natural gas is heading for a test of the April 2023 $1.946 low. 

The energy commodity rallied to $3.392 on the continuous contract in January 2024 as cold weather gripped the United States. The bullish price action failed, sending the March futures to just under the $2 per MMBtu level in early February. 

The end of the peak season is on the horizon

Each year, the peak season for natural gas demand runs from late November through March as heating demand soars. In early February, only weeks remain until withdrawals from natural gas storage turn into injections. Natural gas prices tend to peak as the winter approaches and reach seasonal lows during the injection season. 

While there are still cold weeks on the horizon, plenty of natural gas is in storage across the U.S. to satisfy any heating demand levels. 

Inventories have been falling but remain higher than in previous years

The amount of natural gas in storage across the United States has remained above last year’s level and the five-year average throughout the 2023/2024 peak season. 

Source: EIA

As the chart shows, at 2.659 trillion cubic feet for the week ending on January 26, 2024, natural gas inventories were 2.1% above last year’s level and 5.1% over the five-year average for the end of January. Over the past two weeks, natural gas stocks experienced significant declines, falling 326 billion cubic feet for the week ending January 19 and 197 bcf for the week ending January 26. While cold temperatures increased the heating demand and the amount in storage has declined, it remains comfortably above levels over the past years. 

The withdrawal season in 2022/2023 ended with 1.830 tcf in storage in March 2023. The level of natural gas across the U.S. will likely be higher in March when natural gas begins flowing into storage at the start of the 2024 injection season.

The bullish case for 2024

The factors that could support natural gas prices over the coming months include:

• Natural gas futures are at a low level at around $2 per MMBtu. Technical support stands at $1.946, the April 2023 low, and $1.44, the June 2020 bottom and the lowest price since 1995.
• The bearish trend means that many trend-following traders are short the energy commodity. When an overwhelming number of speculative traders carry short positions, the potential for a sudden recovery is high. 
• The continuing war in Ukraine could impact European natural gas prices over the coming months as Western Europe depends on Russian pipelines for supplies. Since U.S. natural gas travels worldwide in liquid form, any sudden rally in European prices because of supply fears could cause U.S. prices to move higher. Nearby U.S. prices rallied to over $10 per MMBtu in August 2022 over European supply fears.
• According to Baker Hughes, the number of North American operating natural gas rigs as of February 2 was 117, which is 41 lower than the previous year. Fewer rigs mean less natural gas output.

While many factors could cause U.S. natural gas futures to recover, the trend remains bearish in February 2024. 

The bearish case for the coming months

The bearish case for natural gas includes:

• The 2023/2024 withdrawal season ends in March. As natural gas begins flowing into storage, prices tend to move lower. 
• While technical support stands at the $1.946 and $1.44 lows, natural gas prices could drop to lower levels. If we learned anything from the energy markets over the past years, the downside is not limited to zero. Nearby NYMEX WTI crude oil futures fell below zero to negative $40.32 per barrel in April 2020 during the contract’s delivery period as longs had nowhere to store the petroleum. Natural gas could suffer a similar fate if storage capacity does not allow deliveries during the 2024 injection season. 
• The trend is always your best friend in all markets, and it remains significantly bearish in the U.S. natural gas futures arena for delivery at the Henry Hub. 

Natural gas is a volatile energy commodity that tends to take no prisoners when it decides to move higher or lower. One of the most significant factors for the path of least resistance of prices is if the market becomes overly long or short. In February 2024, speculators are short. The extent of those risk positions could determine the path of least resistance of prices and if the energy commodity could stage a substantial rally over the coming weeks and months.

Natural gas’s penchant for price variance means all risk positions require a plan with risk-reward horizons. While altering the plan’s dynamics when natural gas prices move in the anticipated direction is acceptable, adjust stops to protect profits and capital. When the move is contrary to expectations, take your lumps and start over, as a small loss is far better than a catastrophic one. 

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.