Natural gas prices spiked at the end of October to their highest level since January 2019, as lower production supported the market. Prices typically rise during the winter, but with the market retreating in November, has the rally run its course? Do natural gas price projections from analysts suggest investors should buy the dip to profit from a price rebound?
This article looks at the commodity as a potential investment in 2021 and what future natural gas prices predictions indicate about the direction of the market going forward.
What you need to know about natural gas as an investment
US natural gas is traded on the New York Mercantile Exchange (NYMEX). The reference price is Henry Hub, which refers to a natural gas pipeline in the state of Louisiana that serves as the delivery point for NYMEX futures contracts.
The natural gas price outlook is driven by seasonal factors that affect supply and demand, as weather patterns determine how much gas is consumed for industrial, commercial and residential heating supply as well as electricity and cooking fuel. For instance, storm activity, such as that seen in 2020, can disrupt production and tighten the supply balance. Economic factors also drive industrial demand, which rises during times of economic growth and falls during contractions.
Crude oil prices have an effect on the gas market as well, as changes to oil production determine how much gas is extracted with it. Gas is typically injected into storage during the summer when demand is low and withdrawn during the winter to meet the demand for heating, so production and storage injection levels also influence the commodity’s value.
All this makes natural gas a liquid market that creates a plethora of investment opportunities. However, unexpected events can cause unexpected volatility that can put investors on the wrong side of a natural gas trading forecast.
Production disruptions drive natural gas prices while demand remains low
Natural gas prices typically rise during the winter – when demand for heating is at its highest – and fall during the summer. Prices declined in 2019 as a mild winter left the market lower than where it started the year. In 2020, the market has been driven by the impact of the Covid-19 pandemic on industrial and commercial consumption as well as crude oil demand and disruptions to production caused by storms.
Prices hit a 25-year low in the spring with lockdowns to slow the spread of the pandemic and the closure of businesses reducing gas demand. After recovering most of its losses, the natural gas price started falling again to bottom out in summer as US shale oil producers started to reduce output in response to a record drop in US oil prices, in turn reducing natural gas production.
The gas market rallied strongly from late September until the end of October, as an active hurricane season in the Gulf of Mexico further reduced production in the region and demand rose in the US, Asia and Europe as economies began to reopen. The natural gas price rose from a low of $1.83 per million British thermal units (MMBtu) in late September, to $3.35 at the end of October.
The price averaged $2.39 per million British thermal units in October, up from an average of $1.92 in September. The US Energy Information Administration (EIA) noted: “Higher natural gas spot prices reflected stronger demand for liquefied natural gas (LNG) exports as LNG terminals increased liquefaction following hurricane-related disruptions in August and September.”
The EIA estimates that net gas injections into storage totalled 1,914 billion cubic feet during the April-October refill season, 6 per cent less than the five-year average and 26 per cent less than near-record net injections reported for the 2019 refill season. Declines in natural gas production account for most of the reduction in net injections this year. Production averaged 88.5 billion cubic feet per day during the 2020 refill season compared with 92.4 billion cubic feet per day during the same period last year, according to IHS Markit.
But gas prices have fallen in November as the weather in the US has been warmer than forecast, negatively weighing on residential and commercial demand for gas. Jack Scoville, an analyst at the Price Futures Group, noted: “Above average temperatures across the nation suggest that the heat is off for natural gas bulls. A tight market based on a long-term weather forecast calling for a November arctic blast that turned out to be wrong is now going into deep retreat mode.
With winter off to a bearish start for the market, what is the natural gas market outlook from analysts for the following year?
Natural gas price forecast: what is the outlook heading into 2021?
Although net injections into gas storage were lower this refill season, storage levels were already high, and working natural gas in storage in the US totalled 3,920 billion cubic feet as of October 31, according to EIA data. This is the third-highest end-of-refill-season level ever recorded and the highest since 2016, indicating there is ample supply heading into 2021.
However, the EIA “expects Henry Hub spot prices to rise to a monthly average of $3.42/MMBtu in January 2021 because of rising domestic demand for natural gas for space heating, rising US LNG exports, and reduced production”, it said in its recent natural gas price analysis.
Analysts at TPH also expect the market to rebound when temperatures turn lower, they said in a recent natural gas forecast: “After factoring in current forecasts which show warmth extending into mid-December, we are still biased long against a 2021 strip which has gapped down to $2.70/MMBtu.
However, the latest natural gas price prediction from forecasting service Wallet Investor shows the commodity’s value falling in 2021. It expects prices to average $2.63 in December, but plunge to $2.44 in January and decline to $1.97 by April, right before climbing back to $2.30 by December.
What is your natural gas prediction? If you are looking to profit from the rising market volatility without having to commit to long-term investments, you can do so by trading the commodity through contracts for difference (CFDs) at Capital.com.
Through trading CFDs, you can try to profit from both positive and negative price fluctuations by either taking a long position, if you agree with the natural gas price forecast that prices will rebound, or a short position, speculating that the market will fall.
Trade US Natural Gas Spot CFD
However, note that CFDs are a leveraged product. Therefore profits, as well as losses, are magnified.
You can learn more about CFD trading with free online courses and find out how to trade US gas CFDs by reading our comprehensive guide. Once you are ready, create a trading account at Capital.com and stay informed of the latest natural gas price projections to spot the best trading opportunities.