Natural Gas Prices Rally on Stronger Fundamentals

  • NGAS
    (${instrument.percentChange}%)

Improved Supply-Demand Equilibrium

Following the strong supply of the previous years and the slump in natural gas prices during the first quarter, leading producers are now lowering their drilling activity. Chesapeake stands out with output projection of 2.65-2.75 billion cf/d, which constitutes a drop of more than 20% this year, compared to 2023 [1]. EQT lowered again its guidance during the last earnings report, expecting only a marginal increase [2]. China's Sinopec forecasts growth of around 3%, but that would mark substantial slowdown from the 7.1% increase of the previous year. [3]

On the consumption side, things are looking better following the 2023 stagnation and the International Energy Agency (IEA) forecasts a 2.3% y/y expansion this year, largely driven by "the industrial and power sectors in the fast-growing economies of Asia" [4]. Imports in China grew nearly 21% in the first four months [5], highlighting its thirst for natural gas, while Sinopec said domestic demand "rapidly increased" in its Q1 results. [6]

European economies experienced significant weakness last year, with Germany and the UK in recession, amidst restrictive monetary policies to bring inflation down. However, the situation is improving and the European Central Bank is looking to cut interest rates as early as June, while its UK and US counterparts are expected to follow later this year. This would mean a shift towards more favorable environment for these key economies an gas consumers.

There are risks however to the optimistic balance, like Europe's reduced usage in the aftermath of the Russian invasion in Ukraine. Member states agreed in March to extend their voluntary 15% gas demand reduction for one-year [7]. They are also mulling LNG restrictions for their next sanction package against Russia though, which could constrain the flow of the commodity, amidst other supply concerns from the Middle East hostilities.

China meanwhile remains a source of uncertainty, given its bumpy post-pandemic recovery. Its economic health is crucial, since it's one of the top natural gas consumers. Adding to the potential headwinds is the climate change, which leads to higher temperatures. 2023 was the warmest year on record according to Copernicus and the record streak continues this year, as April was the eleventh straight month in a row to be the hottest on record. [8]

NGAS Price Rally

The improving supply-demand equilibrium has fueled a two-month-relief rally, following the slump of the first quarter. NGAS runs its best month in nearly two-years and has moved to profits for the year, which brings the 2024 highs in the spotlight (3.397) and the favorable fundamentals create scope for sustained strength.

On the other hand, the move begins to looks stretched from a technical standpoint and there are risks to the current supportive supply-demand conditions. As such, NGAS may be ripe for a pullback towards the EMA200 (at around 2.210), but daily closes below it that would challenge the upside bias don't look easy.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 23 May 2024 https://filecache.investorroom.com/mr5ir_chk/875/CHK_1Q24_Earnings_Presentation.pdf

2

Retrieved 23 May 2024 https://ir.eqt.com/investor-relations/news/news-release-details/2024/EQT-Reports-First-Quarter-2024-Results/default.aspx

3

Retrieved 23 May 2024 https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0324/2024032400011.pdf

4

Retrieved 23 May 2024 https://iea.blob.core.windows.net/assets/6bc34660-dd8e-4018-bb21-973023846b4c/GasMarketReport%2CQ2-2024.pdf

5

Retrieved 23 May 2024 https://english.news.cn/20240517/004b9ee304e3426a920ce9df83c286bc/c.html

6

Retrieved 23 May 2024 https://www1.hkexnews.hk/listedco/listconews/sehk/2024/0428/2024042800178.pdf

7

Retrieved 23 May 2024 https://www.consilium.europa.eu/en/press/press-releases/2023/03/28/member-states-agree-to-extend-voluntary-15-gas-demand-reduction-target/

8

Retrieved 09 Jun 2024 https://climate.copernicus.eu/copernicus-global-temperature-record-streak-continues-april-2024-was-hottest-record

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