Natural gas ended March 2016 with almost a 14 percent gain, but lost 16.2 percent for the quarter, and the gut-wrenching volatility in this market makes it a very difficult commodity to trade.
For traders, Mother Nature adds to the unpredictability and she can be a formidable foe, playing an important role in determining demand for natural gas, as around 50 percent of U.S. households use the commodity to heat or cool their homes.
As such, natural gas traders should not only understand the nitty gritty of supply and demand, they have to keep a close eye on the weather forecast as well.
Here’s what you need to know: Natural gas prices are cyclical in nature. Demand is highest during the winter months (December-February) and after a lull, demand picks up again during the summer months (July-August). During the rest of the year, demand is lower due to milder weather conditions.
According to the weekly U.S. Energy Information Administration’s (EIA) natural gas inventory report, inventories fell by 25 billion cubic feet per day (Bcf/d), which is equal to the five-year average. However, inventories are 68 percent higher compared to the same period last year, and 52 percent higher than the five-year average. Related: Shocking Photo: Nearly 30 Oil Tankers in Traffic Jam Off Iraqi Coast
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According to the EIA, natural gas consumption in 2015 was 75.3 Bcf/d, whereas, demand in 2016 is expected to increase to 76.8 Bcf/d in 2016 and reach 77.3 Bcf/d in 2017. This increasing demand is buoyed by higher demand from the electric power sector, chemicals, and fertilizer sector. Related: Oil Stages Comeback On Bullish EIA Data
When supply is unable to meet the demand, prices increase. Production in 2015 averaged 78.9 Bcf/d, which is an increase of 4 Bcf/d over 2014. Due to the falling rig count and lower natural gas prices, the EIA expects growth to slow to 0.9 percent in 2016 and again increase by 2.1 percent in 2017.
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Corresponding to the supply and demand scenario, the EIA projects Henry Hub natural gas prices to average $2.25/MMBtu in 2016 and $3.02/MMBtu in 2017.
The uptrend is expected to start by May 2016 as shown in the chart above. Related: Are The Saudis And Russians Deliberately Sabotaging Doha?
After analysing the demand, supply, and cyclical nature of natural gas, let’s try to make some price forecasts based on the charts.
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The low of $1.611/MMBtu made on 04 March 2016 was bought aggressively by traders. We find strong bullish divergence patterns on the chart, which should support a move towards $2.175/MMBtu.
On the downside, $1.80/MMBtu should act as a decent support. Traders should use dips towards $1.80 to take long positions with a stop loss below the lows and a target of $2.17 and an optimistic target of $2.40 later in the year.
At the end of the day, natural gas prices will continue to remain volatile, reacting to weather-related news and any news of a major supply disruption. The massive drop in rig counts and the struggling natural gas producers have put a floor beneath the prices; however, the increased efficiency and resilience of the existing suppliers and additional supply to be commissioned continue to put a lid on the prices.
Under such circumstances, prices are likely to trade in a wide range until the fundamentals of supply and demand are balanced.
Traders should utilise the trading range to take short-term positions instead of a long-term view. Nonetheless, due to depressed prices, any adverse news can push prices considerably higher.
By Rakesh Upadhyay for Oilprice.com
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