Natural Gas Set to Grow from Long-Term Support

Natural gas is a crucial component of the global energy landscape, widely used for electricity generation, heating, and as a chemical feedstock. Its price is impacted by inventory levels, geopolitical events, and weather patterns, all of which have significant economic implications. Recent inventory reports indicate higher demand and suggest a bullish outlook for natural gas prices.

This article presents the technical analysis of natural gas prices and identifies investment opportunities for long-term and short-term investors. It is found that the price of natural gas is bottoming out from the long-term baseline support and is poised for the next surge.

Global Economic Indicators and Natural Gas Trends

Natural gas is pivotal in the global energy landscape due to its versatility, efficiency, and relatively cleaner combustion than other fossil fuels. It is extensively used for electricity generation, heating, and as a feedstock in the chemical industry. Consequently, fluctuations in natural gas prices can have significant implications across various sectors and the broader economy. Several factors influence these price movements, including inventory levels, geopolitical events, and weather patterns.

The recent report of natural gas inventories increasing by 10 bcf versus the expected 27 bcf highlights a scenario of higher demand or lower supply than expected, which is bullish for natural gas prices. When inventory increases fall short of expectations, it often signals stronger consumption or reduced production, driving prices up as the market adjusts to the tighter supply-demand balance.

In the context of global economic indicators, the performance of major energy players like China Petroleum and Chemical Corp (Sinopec) is crucial. Despite a marginal increase in crude throughput and natural gas output, Sinopec’s refined fuel sales have declined, reflecting tepid domestic demand.

This slowdown and higher crude prices indicate potential bearish pressure on natural gas prices due to reduced industrial activity and transportation fuel consumption. The broader economic implications suggest that natural gas demand may not surge significantly in the near term, but it may stabilize sometime before the next move.

Moreover, the operational disruptions at Freeport LNG in Texas further complicate the natural gas market dynamics. The halting of LNG processing due to Hurricane Beryl and the subsequent slow restart have already impacted U.S. natural gas futures, which dropped significantly as the market priced in the reduced export capacity. However, the Freeport LNG has resumed operations but may have some limitations on the operations. On the other hand, supply constraints may temporarily boost domestic natural gas prices with several LNG tankers waiting to load and the facility not yet operating at full capacity.

A complex interplay of inventory levels, economic performance, and unexpected disruptions influences natural gas prices. The recent inventory report points to bullish signals in the short term. At the same time, Sinopec’s performance and Freeport LNG’s operational challenges underscore the nuanced and dynamic nature of the natural gas market.

Historical Price Spikes in Natural Gas

The technical perspective for natural gas also suggests that the prices form a long-term bottom. The monthly chart for natural gas shows that the price has been trading in a highly volatile market, fluctuating within a broader range of $15 for the past three decades. It is observed that the price has been landing at the long-term baseline, marked by the red line in the chart below. The market tends to rally when prices approach this line, sparking price increases.

These rallies are evident in the price spikes of December 2000, February 2003, October 2004, September 2005, June 2008, February 2014, November 2018, and August 2022. Price fluctuations were higher during 2000, 2008, and 2022 when the financial markets faced challenges due to the global financial crisis. However, the price spikes from 2009 to 2020 were lower.

Since the market has been trading within a broader range of $15, it has not reached extremely overbought or oversold technical conditions on long-term time frames, as indicated by the RSI. When RSI trades near the overbought levels, price spikes are typically completed, and prices quickly drop to the baseline support. Here, the RSI does not reach oversold conditions, and prices rebound from the baseline support to hit the upper boundary of resistance again.

These long-term market behaviour and trading ranges attract investors, considering buying natural gas when the price is around $1 to $2 and investing in long-term timeframes. Investment opportunities for long-term investors were observed in January 2002 when the low was $1.85, April 2012 with a low of $1.90, March 2016 with a low of $1.61, and June 2020 with a low of $1.52. This long-term investment approach has resulted in strong profits for investors within short timeframes.

Interestingly, natural gas has again hit the baseline support in February 2024, marking a low at $1.52. The price shows strength and is expected to surge in the next few months. The strong rebound in 2024 is logical and indicates that buying at this level could push natural gas prices much higher towards the upper range of these fluctuations. The ongoing geopolitical global crisis may positively impact prices and help natural gas rise significantly.

Key Turning Points and Investment Opportunities in Natural Gas

To further evaluate the above discussion, the weekly chart below illustrates the price behaviour during the turning points of natural gas. The chart zooms in on similar patterns on a weekly scale, showing that the price consolidation in 2020 at the long-term baseline resulted in a strong rally.

Conversely, the price consolidation at the upper resistance band in 2022 significantly dropped towards the same long-term baseline support. In 2023, the price has again formed a consolidation pattern similar to that of 2020, indicating that the price is looking for a surge again. The chart clearly explains the price fluctuations before the surge and before the price drop.

The RSI has not reached oversold levels in the weekly chart, similar to its behaviour in the monthly chart. Therefore, the RSI trading below the midline also indicates a strong potential for a surge in natural gas prices.

To further understand the above technical formations, the daily chart below also shows the formation of strong bullish price action, indicating a good opportunity for long-term investors. The oversold conditions are observed in the daily chart using the RSI indicator, suggesting a strong potential for a rally in natural gas prices.

It is found that when natural gas formed a bottom, the price confirmed the triple bottom at $1.64, $1.65, and $1.69 before surging higher on the daily charts. After hitting resistance at the red trendline at $3.16, the price dropped again to form the right shoulder. Yesterday’s strong rebound from the $2.02 level indicates the price is bottoming and ready to rally higher.

Investors can consider buying natural gas with a long-term horizon and holding positions until the price spikes again.

Final Thoughts

In conclusion, natural gas remains a critical component of the global energy market, with its price fluctuations significantly influenced by various factors such as inventory levels, geopolitical events, and weather patterns. Recent trends indicate a bullish outlook for natural gas prices due to higher demand or lower supply, as evidenced by inventory reports.

The performance of major energy players like Sinopec and disruptions at facilities like Freeport LNG also impact market dynamics. Long-term investors can benefit from understanding these factors, as historical price spikes and current technical formations suggest potential investment opportunities in the natural gas market.