This article presents the fundamental and technical outlook for natural gas prices to identify the next direction for the market. It has been found that natural gas experienced a robust resurgence, primarily driven by a significant increase in demand from Asia. This recovery followed a period of instability marked by supply shocks and rebalancing efforts.

Despite this growth, the market remains fragile due to underperforming LNG production and persistent geopolitical tensions, contributing to recent price increases across significant markets. However, despite the risks, prices consolidate within long-term buy zones, indicating long-term solid investment potential.

Natural Gas Demand Surges with Asia Leading the Growth

In H1 2024, global gas markets experienced a notable return to growth, following a turbulent period marked by supply shocks and subsequent rebalancing. The increase in global gas demand, recorded at approximately 3% year-on-year, exceeded the historical average growth rate, suggesting a significant recovery.

However, this resurgence is underpinned by underperforming LNG production and geopolitical tensions that add to market volatility. Despite a drop in gas prices during Q1 to levels reminiscent of pre-crisis conditions, recent months have seen an increase in prices across major markets. This price increment reflects tightening supply-demand dynamics, further complicating the outlook for the remainder of 2024.

Asia played a critical role in driving global gas demand growth in H1 2024, accounting for a significant portion of the increase. Both China and India saw gas demand increase by over 10% y-o-y, primarily due to heightened industrial activity. This sector alone contributed to nearly 65% of the global demand growth during this period, highlighting the region’s economic expansion as a key factor.

However, growth in the power sector was more subdued, with only a 2% increase y-o-y, as gains in North America and Asia were partially offset by declining gas-fired power generation in Europe. Additionally, warmer-than-usual temperatures in Q1 led to only a modest 1% increase in gas demand in the residential and commercial sectors.

The Q2 2024 marked a turning point for global LNG supply, which saw its first contraction since the COVID-19 lockdowns of 2020. The year-on-year decline of 0.5% in LNG production was a result of feed gas supply issues and unexpected outages, disrupting what had otherwise been a steady recovery in LNG output.

This contraction, coupled with robust Asian demand, placed upward pressure on global gas prices, particularly in key import markets. The impact of these supply challenges was most pronounced in Q2, where the tight supply-demand balance exacerbated price volatility and raised concerns about the market’s stability. The decline in US natural gas storage, which is contributing to bullish action in natural gas prices, is shown in the chart below.

Looking ahead to the second half of 2024, LNG supply is expected to rebound, driven by new liquefaction capacity coming online, particularly in the United States. The expansion of existing plants and the commissioning of new ones, such as the Tortue FLNG plant in West Africa, are poised to enhance global LNG export capacity.

However, this increase may not be sufficient to meet the growing demand in import markets, which is expected to slow down compared to the first half of the year. Despite this slowdown, global gas demand for the full year is forecasted to rise by 2.5%, primarily supported by industrial use. At the same time, the power sector is likely to see only marginal growth.

Over the medium term, the deployment of low-emissions gases is projected to accelerate, with supply expected to more than double by 2027. This surge is expected to contribute an additional 16 bcm to the global gas market, with Europe and North America leading the charge. However, emerging producers such as Brazil, China, and India are also expected to ramp up their output. This expansion reflects increased policy support and the growing emphasis on reducing carbon emissions.

Natural Gas Poised for a Potential Rally After Long-Term Consolidation

The monthly natural gas chart discussed in the previous article shows signs of emerging from the bottom. As mentioned, natural gas is currently within a long-term investment area where a strong foundation has been formed through months of consolidation, setting the stage for a potential rally. This area is often called the buy zone for the 21st century.

Interestingly, when the price enters this buy zone, it consolidates for several months before preparing for a rally. Once the rally begins, prices typically show sharp spikes. The monthly candle for July was bearish, but as August nears its close, the price is building bullish momentum on shorter-term timeframes. Once this momentum is fully established, prices are likely to rally higher.

Another chart, discussed in the previous article, has been updated with the latest market movements, as shown below. It reveals that the price bottomed at $1.522 in Q1 2024 and has since rebounded strongly toward the red trend line. Furthermore, the last few weeks have been building bullish momentum, suggesting the potential for higher prices.

The RSI still sits below the midline, which is typically the level where natural gas bottoms out. Additionally, the RSI shows signs of a bullish divergence following the drop in July 2024. These price fluctuations are similar to those observed during the 2020 period, leading to a strong price surge.

When zooming in on the chart data at the daily scale, the chart below shows an inverted head and shoulders pattern in the natural gas market, with the head at $1.882 and the shoulders at $2.015 and $2.097, respectively. The neckline of this pattern lies at $2.301, and a breakout above this neckline could initiate a short-term rally toward the red trendline, as discussed in the weekly chart above. This initial rally will likely stabilize further, potentially leading to a solid surge to much higher levels. This significant price movement is expected to be supported by ongoing geopolitical conditions.

Market Risks

Despite the promising outlook for natural gas in 2024, several market risks could significantly impact the trajectory of prices and demand. One of the primary risks is the ongoing volatility in LNG production, which has already seen contractions due to feed gas supply issues and unexpected outages. If these production challenges persist or worsen, they could lead to tighter supply conditions, exacerbating price volatility and potentially dampening global demand.

Moreover, the geopolitical landscape remains highly uncertain, particularly concerning energy supplies from key regions such as Russia. Any escalation in geopolitical tensions could disrupt supply chains, leading to further instability in natural gas markets and complicating the anticipated recovery.

Another significant risk is the potential for a slower-than-expected economic recovery in major demand centers, particularly in Asia. While China and India have driven much of the recent demand growth, any slowdown in their industrial activity due to economic headwinds could reduce demand for natural gas, undermining the bullish outlook.

Furthermore, the anticipated rebound in LNG supply, particularly from the United States, may not materialize as quickly or robustly as expected, leading to supply-demand mismatches that could either cap price gains or lead to unexpected price spikes.

Lastly, while the push for low-emissions gases is a positive long-term development, the transition could face delays, limiting the expected contribution of these cleaner energy sources to the global gas supply and leaving the market more vulnerable to traditional supply disruptions.

Bottom Line

In conclusion, the natural gas market in 2024 is showing signs of a significant recovery, driven primarily by strong demand growth in Asia and supported by a favorable long-term investment environment. Despite challenges such as underperforming LNG production and geopolitical tensions, the market’s fundamentals are gradually strengthening.

The recent price rebound from Q1 lows and emerging bullish technical patterns suggest that natural gas is poised for a potential rally. As global LNG supply is expected to recover and low-emissions gases play an increasingly important role, the market appears set for sustained growth. However, ongoing volatility and geopolitical factors will continue to influence price movements. Investors may consider investing in this region focusing on long-term investment goals and targeting the $7-$10 range.