Investing in natural gas: Time to trade the commodity?
18:23, 26 July 2022
Are you currently investing in natural gas or have the desire to but don’t know where to start? The market highs and lows are clearly apparent, making it difficult to know what position to take next.
Read on to find out what key events could cause natural gas price swings – and to find out what energy analysts think about trading the commodity during these volatile times.
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What's heating up US gas prices?
In the US, natural gas prices on the benchmark Henry Hub – a natural gas pipeline located in Louisiana that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX) – are high!
“The surge in natural gas prices continues unabated, with the August contract reaching $8.874/MMBtu yesterday (Monday) to post the eighth daily gain within the last 13 sessions. The steep market uptrend is extending in early-morning trading to test the psychological $9.00/MMBtu barrier ahead of August options expiration,” EBW Analytics said in a note to clients on Tuesday.
Fundamentally, EBW further noted, the very hot weather the US is currently experiencing is the predominant bullish driver – and often is when it comes to natural gas prices as more people turn up the dial on their home cooling systems to cope with it.
What’s causing Europe gas prices to fluctuate so much?
Meanwhile, in Europe, natural gas prices are also heating up on the benchmark Dutch Title Transfer Facility (TTF) as relations between the bloc and Russia continue to deteriorate – impacting prices.
Why? Because Russia was and still is a major supplier of natural gas to Europe and since it invaded Ukraine on 24 February, member states were urged to move away from Russia’s commodities – including its oil and gas – as part of a package of sanctions against the Kremlin.
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Problem is, there is big competition for natural gas at the moment, including from Asia, and Europe does not have the infrastructure in place to comfortably cope entirely without Russia’s supplies just yet.
So when Russia’s energy giant Gazprom (SIBNru) said it was reducing gas flows anyway via the Nord Stream 1 pipeline again on Monday to 20% capacity it prompted European leaders to meet and come up with a solution to the latest disruption. The plan? For member states to ration gas by 15% from August 2022 until March 2023. The market reaction? Higher prices due to strong demand when supplies are tight puts upward pressure on them.
Gas futures jumped 14% to €201.75 per megawatt hour (MWh) on Tuesday, which is the highest level seen on the TTF since March – showing just how much these geopolitical moves can impact the markets when a big strain on supplies is on the cards.
Investing in natural gas – how to trade in volatile times
Traders must first understand the trend’s direction as well as the dynamics influencing prices, said Piero Cingari, commodities analyst at Capital.com.
“When natural gas prices begin a strong upward trend, such as the one we are seeing now, the best strategy is to buy when the market dips a little bit, as long as the main factors that support the major trend remain in place,” he said.
“In the case of natural gas, prices are being driven by massive supply issues in Europe as a result of a sharp drop in Russian supplies. As a result, the price of gas in the United States or Asia faces upside pressures as European countries seek alternative supplies. As long as the conflict between Ukraine and Russia continues, this represents a significant upside risk factor for natural gas prices,” Cingari added.
Concerning the European benchmark Dutch TTF, Cingari said it must be understood that its fate is currently decided by a single man – Russia’s President Vladimir Putin.
“The presence of a severe recession in Europe caused by gas rationing, which could lead to a decline in demand for LNG for industrial purposes, could call the bullish trend on US natural gas into question. A severe recession in Europe caused by gas rationing could reduce industrial demand for LNG, threatening the bullish trend in US natural gas. However, because natural gas is a primary commodity for household heating and the generation of electricity, even a recession might not have the desired effect on prices,” Cingari further noted.
Is volatility too high to trade natural gas?
Energy analyst at Primary Vision, Osama Rizvi, thinks so.
“Volatility is too high! The situation between Russia and Ukraine remains tense. As an extension, the relations between Europe and Russia will remain tense. Sanctions won't be lifted anytime soon. On the contrary, the Nord Stream 1 pipeline is running only at a 20 percent capacity,” Rizvi told Capital.com on Tuesday.
“Therefore, uncertainty and volatility will remain high. Hence, I would never advise to dabble in the natural gas markets right now,” he added.
A chance to buy the natural gas dip?
The majority of influencers in the natural gas market at the moment in Europe particularly, are on the bullish side and it doesn’t look like there will be a significant price decline soon, Evridiki Dimitriadou, energy analyst at S&P Global Commodity Insights, told Capital.com on Tuesday.
“After Gazprom said on Monday it will set Nord Stream 1 supply to the EU at 20% after a previous reduction to 40% and a 10-day maintenance, TTF Dutch futures have spiked, and a similar increase is also observed for Henry Hub front month futures,” she said.
“Freeport’s LNG plant outage in the US in June has only added upwards pressure to the European market particularly as the continent is relying more significantly now on US LNG exports in order to minimise Russian gas consumption in turn. At the same time there is already strong demand for Qatar gas exports to Europe, and as we move towards winter Europe will have to compete even more with Asia for those volumes along with US exports.”
Gas storage, interest rates and OPEC+ – others to watch!
Dimitriadou also noted that the EU gas storage is about 66% full, which is significantly below the 80% target set for November when heating demand will be higher. Certainly another factor to be mindful of when watching for price fluctuations.
“Additionally, fundamentals are relatively bullish for associated markets as well, particularly oil, as fuel switching potential will be considered. Geopolitics, and macroeconomics, including expectations for a hike in the Federal Reserve interest rate along with no major expectations for significant oil supply increase examined by OPEC+ at their upcoming 3 August meeting, will contribute to a tight oil market as well,” she concluded.
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Although natural gas suffers fewer price fluctuations than oil, trading natural gas can still be volatile resulting in a high degree of risk. The chance of making large profits goes hand in hand with the risk of large losses.
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