Natural gas prices are notoriously volatile. From approximately $4.50 per one million British thermal units (MMBtu) last year to a low near $1.90 MMBtu in April, this represents a huge swing with massively divergent market views. Natural gas has become a great asset for the U.S., as we’re able to produce natural gas at a significantly lower cost than anywhere else in the world. This has led to a large increase in the supply of natural gas, leading to a negative market view on price over the past year. The reason for the negative market view on the price of natural gas is a lack of storage facilities and an inability to ship the commodity overseas.
The storage facilities for natural gas earlier this year were on pace to be completely filled. If that were the case, the price for natural gas would have collapsed completely. Oil producers that also have natural gas being pumped out of wells have nowhere to store it; they would have no choice but to burn it up through flaring it. However, Mother Nature has come to the rescue for natural gas prices, as the high temperatures across the nation have increased natural gas consumption for electricity use to generate air conditioning, improving the market view.
Much of the market view for natural gas is based on external factors, such as weather, and this can be extremely difficult to predict. We all know how difficult it is for the weatherman to be accurate; now you have to combine supply and demand dynamics with Mother Nature. As Texas accounts for a large portion of natural gas electricity generation, the weather in the area is extremely important. Temperatures in Texas have been extremely hot lately, which has raised the market view for natural gas prices. Some good news over the short term might be on the way as the National Weather Service reports that milder temperatures should settle in that area for the next couple of weeks, which might put a damper on prices.
There is still the potential for prices to decline over the short term if temperatures cool off in the latter part of the summer.
In the long run, however, I believe natural gas prices are set to increase over the next decade. As more vehicles begin the shift to natural gas use over gasoline, and more factories are using natural gas as an input, the demand side of the equation is going to go up. While I think that’s the long-term market view, over the short-term, there are many more variables to take into account.
Chart courtesy of www.StockCharts.com.
The chart for natural gas shows that the market is at the approximate 50% retracement level from the relative high last fall to the lows in April. Note that the $3.00 area has been a crucial level in the past. Also note that the 200-day moving average is causing some resistance during the recent upswing from a negative to a more positive market view. For a bullish move to continue, the commodity would need to make a low in price that is above the one made in June, which is just below $2.25.
Most likely with this formation, I would think the market will trade in a range of $2.50 to $3.00 before breaking out to either side. Of course, with the weather, anything can happen. We could have a massive heat wave continue all summer long, followed by a horrific hurricane season, and natural gas could move up substantially. Or the summer temperatures could cool, and storage facilities get filled again, with the price collapsing. Watch the key support and resistance levels for indications of where other investors are willing to express their market view with explicit buying and selling.