End of crash mode, natural gas set for rebound
NATURAL gas is one intriguing commodity, leaving investors wondering since the onset of the Russia-Ukraine-instigated supply-side crisis. The world’s favourite heating fuel dropped almost 80 per cent from its high last year, much harsher than the rise in markets witnessed in 2022. The US benchmark, Henry Hub Natural Gas, is still down 38 per cent year to date and market players continue to speculate whether or not the crash mode is still on for the natural gas sector. One thing’s for sure, the worst isn’t over till it’s over! For as much as the bears have enjoyed the steep crash down the hill, in my opinion, the worst seems to have really passed for the natural gas sector.
Natural gas was abundantly supported by a technical support zone of US$2-US$2.2 per million British thermal units (MMBtu), which was its low in 2021. It took precise support at the zone before it managed to cover its prior week’s losses. Natural gas futures experienced a sharp reversal after testing a fresh low of US$1.967/MMBtu on Feb 22, 2023, and continued to move upwards till Mar 2, hovering around US$2.789/MMBtu.
The recent rally in prices is primarily attributed to changing weather forecast for a cooler-than-usual March. After the mildest winter in history, a deadly winter storm returned in the US Northern Plains and upper Midwest, instigating a choppy uptrend movement in natural gas futures, gaining almost 40 per cent so far in the week. However, on the upside, natural gas is likely to test a resistance level of the 50-day moving average of US$3.100/MMBtu and a strategic support level of US$3.3-$3.5/MMBtu while any dip on the downside around levels of US$2.4/MMBtu will be a cue for bulls to enter.
Natural gas plunged to newer lows breaching all historic support zones one after another and seems to have tested extreme downside lows multiple times on concerns that rising Fed rates can trigger an economic slowdown in the denting demand of the world’s largest economy.
Last week’s rebound in natural gas is part technical and part fundamental. Markets were oversold in derivatives around relative strength index levels of 30 per cent and over-supplied fundamentally and physically, and would have taken any possible bullish cues from any source to rebound.
On the flip side, there are still some bearish elements investors should take note of, including an inventory surplus that would most likely be carried over to the summer as fuel for cooling instead. Natural gas storage stood at a total of 2.114 trillion cubic feet, or tcf, as at the week ended Feb 24, 2023, with a 27 per cent jump from the level of 1.663 tcf a year ago, as reported by the US Energy Information Administration. Furthermore, there are clear signs of slowing US petrol demand as the country grapples with high inflation and rising interest rates.
The writer is market analyst at Phillip Nova.
Copyright SPH Media. All rights reserved.
