Natural gas prices are falling, and the speculators have cut their U.S. natural gas net long positions for the fourth straight week. Does this indicate further weakness, or is this a contrarian buy signal?
Let’s analyze the fundamentals and the chart pattern of natural gas to arrive at an answer.
Natural gas is mainly used for electricity generation. During summers and winters, the demand for electricity increases, hence, the demand for natural gas goes up. After all, about 50 percent of all U.S. households use natural gas for heating purposes.
In pleasant weather conditions, the need for cooling or heating decreases; therefore, the need for electricity decreases. As a result, natural gas demand at the gas-fired plants also falls.
Let’s look at the demand and supply metrics to analyze the prospects of natural gas.
The Commodity Weather Group LLC expects temperature to be below normal in the central U.S. and average on the East and gulf coasts from June 24 to June 28. A cooler summer implies reduced natural gas demand, which is causing prices to fall.
“The forecasts really aren’t looking good from a bullish standpoint,” said Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut. “It looks like one of the mildest springs we’ve seen in a while in terms of power sector demand, and there are signs that production is coming back,” reports Bloomberg.
Therefore, unless the weather changes, the domestic demand is likely to remain subdued. Related: Libya’s Largest Oil Field Resumes Production
After one of the warmest winters on record followed by a mild spring, natural gas inventory is at 2.709 Bcf. Though the current stockpiles are 11 percent lower than the previous year, they are 9 percent above the five-year average at this time of the year, according to the U.S. Energy Information Administration.
However, one area that could increase the demand for the U.S. natural gas is exports. The current Gulf crisis involving Saudi Arabia and Qatar could open new avenues for the U.S. to export their natural gas to new locations.
Last year, the U.S. exported 184.3 billion cubic feet of LNG. Currently, the exports reach 23 out of 35 countries that have the facility to accept LNG transport vessels. Reuters reported 18 ships loading LNG for global delivery in Sabine Pass in May.
Compare this to the period between 2011-2015, when Japan was the only importer of U.S. LNG. Before that, the U.S. only exported to Canada and Mexico via pipelines.
The future, therefore, looks promising. American Action Forum, believes that the annual trade value of natural gas exports will increase from about $564 million in 2016 to $31.8 billion by 2020. Thus, exports could be a major source of demand for U.S. natural gas in the future. In the short-term, if the Qatar boycott prolongs and gets ugly, U.S. natural gas might be a direct beneficiary.
The Gulf “conflict provides opportunity for the United States in exporting our natural gas. We are a neutral nation. Other countries like China or other Qatar customers would not have to worry about anything if they wanted to import U.S. LNG,” said Harold Hamm, chairman, and CEO of Continental Resources, reports CNBC.
On the supply front, at the start of this week, the U.S. production in the past 30-days averaged 71.5 billion cubic feet per day (bcfd), while last year, during the same period, the average was 71.4 bcdf.
For 2017 and 2018, the U.S. EIA expects natural gas production to increase to 73.3 Billion cubic feet per day (Bcfpd) and 76.6 Bcfpd compared to the production of 72.3 Bcfpd in 2016. This shows that supply is expected to remain strong and may surprise on the upside as the shale oil drillers increase their drilling activity. Related: Is Russia Running Out Of Patience With OPEC?
Presently, production is increasing, but the demand is weak due to unfavorable weather, and inventories are running well above the 5-year average. Hence, the near-term fundamentals look bearish, unless the weather changes, which will increase demand for natural gas.
On the other hand, U.S. natural gas exports are increasing and the Gulf crisis has offered an opportunity to the U.S. to expand their reach further. If the U.S. natural gas producers can grab this opportunity, the long-term fundamentals look good.
What do the charts forecast?
(Click to enlarge)
Natural Gas is in a downtrend. If the immediate support of 2.882 breaks, a fall to 2.522 becomes a possibility. The short-term picture changes only if the price breaks out and sustains above the downtrend line.
In the long-term, the commodity is forming a large bearish head-and-shoulders pattern, which will complete if natural gas breaks below the support of 2.522. It will be a very negative development if that happens.
Thus, for the short-term, neither the fundamentals nor the technicals justify a long position at the current levels.
By Rakesh Upadhyay for Oilprice.com
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