Natural Gas Poised for Bullish Continuation with Solid Demand

Natural gas (NG) has become a critical player in the global energy landscape, attracting attention due to its role in driving economic growth and its potential to serve as a cleaner alternative to other fossil fuels. With evolving geopolitical dynamics, advancements in LNG infrastructure, and shifting demand patterns, natural gas markets are experiencing significant changes. This article presents a fundamental and technical overview of the supply and demand dynamics that may impact natural gas prices in the short and medium term.

Increasing Global Demand and Price Trends in Natural Gas

Natural gas is entering a phase of substantial growth which is propelled by significant investments in LNG infrastructure. These advancements are expected to catalyze demand, with the Middle East emerging as a new consumer of LNG. The global appetite for natural gas is projected to increase year after year from 2021 onwards, with an expected demand of around 450 million metric tons, as shown in the chart below. The Asia Pacific region will be the primary driver, accounting for approximately 326 million tons, reflecting its growing dependence on this energy source for economic expansion.

Moreover, the natural gas futures recently increased above $2.30 per MMBtu, approaching levels not seen in two months. This price increase is attributed to seasonal demand growth, record LNG exports, and a surge in natural gas usage in China’s transportation sector. Even as US production hits unprecedented highs, the expected rise in demand from power generation and industrial use suggests a tightening market ahead. While inventories remain slightly above average, potential disruptions from Gulf Coast weather events and increasing export activities could rapidly diminish these reserves, pushing prices further upward.

As per the latest data on 12^th September 2024, the decrease in supply by 0.8% (0.9 Bcf/d), driven by a drop in dry natural gas production and net imports from Canada, indicates a potential market tightening. However, overall U.S. natural gas consumption has fallen by 3.0% (2.2 Bcf/d), including a significant 7.7% decline in natural gas used for power generation. Although there is a marginal increase in industrial consumption and a notable increase in residential and commercial usage, the overall drop in demand outweighs the reduction in supply. This suggests that the market might not immediately experience the effects of the reduced supply, potentially leading to price stability.

Moreover, the slight increase in natural gas deliveries to export terminals, up by 0.1 Bcf/d, indicates sustained export activity, particularly from South Louisiana and South Texas terminals. The export demand remains robust, with twenty-three LNG vessels departing U.S. ports and a carrying capacity of 87 Bcf. This export activity, the decreased domestic supply and fluctuating domestic demand may create upward pressure on natural gas prices. However, the overall market impact will depend on how these supply and demand factors evolve, especially considering seasonal changes and international market dynamics.

Weaker Dollar and Supply Disruptions Support Natural Gas Prices

As the market expects a potential rate cut by 50 basis points on Wednesday, this will likely result in a weaker US dollar. The weaker US dollar makes US commodities more attractive to foreign buyers. Consequently, this could further increase export demand for US natural gas, adding upward pressure on prices as international buyers take advantage of the favorable exchange rates. The U.S. monthly gross natural gas exports for the past decade are shown in the chart below. It is found that the U.S. received a 10% increase in natural gas exports compared to the previous year, which reached an unprecedented 20.9 Bcf/d.

Furthermore, the current supply disruptions in the Gulf of Mexico due to Hurricane Francine have resulted in 16% of natural gas output remaining offline. In tandem with potential increased demand from a weaker dollar, the reduced supply paints a bullish picture of natural gas prices. This scenario is further complicated by supply and demand factors, which are affected by the drop in US natural gas storage levels and the challenges in European gas supplies due to maintenance delays and geopolitical tensions. Based on these factors, natural gas prices are poised for potential growth in the near term, driven by increased export demand and ongoing supply challenges.

Technical Bottom Formation in Natural Gas

The chart below shows the medium-term development of natural gas prices, indicating that the price is forming similar patterns to those seen in the first and second quarters of 2020, when prices bottomed and then surged higher. After forming a peak, prices again created a topping pattern in the second and third quarters of 2022, confirming a top, which led to a subsequent decline.

The long-term baseline support is around the $1.50 level, as indicated by the horizontal red line. This support suggests that prices could form a bottom again and potentially initiate a strong rally. Previously, the long-term perspective of natural gas indicated that prices are already on their way up. The RSI is now breaking above the mid-level of 50, further strengthening the bullish outlook. The red trend line in the chart below is similar to the trend line during the 2020 consolidation, indicating that a break above $3.16 in natural gas could trigger a strong price surge.

The short-term daily chart below shows a rounding bottom at the long-term support zone of $1.50 to understand the bullish price action further. This rounding bottom formation indicates a strong potential surge toward the red trend line. The oversold conditions observed using the RSI in August 2024 suggest that prices will likely continue increasing.

The short-term price action is extremely bullish, supported by a long-term bottom formation. The development of an inverted head and shoulders pattern in the chart below suggests that the next upward move in natural gas has begun, indicating that prices are set to surge higher.

Bottom Line

In conclusion, the natural gas market is positioned for substantial growth, driven by rising global demand, particularly in Asia, and significant investments in LNG infrastructure. Despite recent supply disruptions and a decrease in overall U.S. consumption, the potential Federal Reserve rate cut, ongoing export activities, and technical bullish signals point toward a bullish market and upward pressure on prices. From a technical perspective, natural gas prices exhibit bullish patterns, including the formation of an inverted head and shoulders and a rounding bottom. The market is poised for a significant rally fueled by fundamental and technical factors.