Natural gas slump continues, but hope is in sight for bulls

Natural gas prices collapse as European supply fears subside

Natural gas has seen huge volatility over the course of the past year, with prices having lost 75% since reaching fresh 14-year highs in August. Much of that bull run was borne of fear around how Europe might struggle to obtain enough non-Russian supplies to see out the winter. Undoubtedly the Russian invasion of Ukraine brought huge upheaval in the providing of gas in Europe, with countries having to shift their supply chains to become far more diversified after years of Russian reliance. Instead, many looked towards the US and Asian liquified gas (LNG) which could be shipped in to top up European supplies. This explains why the European spike in gas prices also extended to the likes of the US (to a lesser degree). With European efforts to fill storage proving successful, the relatively mild winter has ensured that the potential crisis failed to come to fruition this time around.

From a supply perspective, it is important to track the European storage levels to signal the chances of a supply crunch like that which sparked the sharp price spike in the first half of 2022. This table below provides us with several key pieces of information. Firstly, we can see that gas injections were particularly elevated this time around, with withdrawals also seeing a major decline throughout December and January. It is important to note the different refilling and withdrawal periods for gas, with obvious implications for the underlying natural gas price (we will get onto that). Looking at current storage levels, they are almost double what was in place this time last year.

European Natural gas demand adjusting to higher prices

On the demand side, we have seen rising prices hit demand, with consumers and businesses taking a more cautious approach than would ordinarily be the case. The chart below highlights how most nations have seen consumption across households and industry decline significantly compared with the 2019-2021 averages. Notably, the one area that has seen a more mixed experience is in power generation, with France and Spain in particular utilizing significantly higher levels of natural gas for power generation despite increased cost. Nonetheless, demand is overwhelmingly below historical levels given the rise in prices. While many providers have been slow to pass on the recent decline in prices to customers, it would make sense that demand will rise once again is natural gas remains where it is. European gas prices are back to the lowest levels since late 2021.

Will next winter provide the next supply squeeze?

With China demand coming back onto the market after an extended period of lockdowns, it is worthwhile noting that Europe may find it more difficult to obtain Asian gas in advance of next winter. Europe tends to start picking up its ‘injection’ phase in March/April, which has market important upward inflection points in the past. The fact that European storage levels are so healthy should help alleviate any fears of another dramatic spike like that seen in 2022. However, the prospect of Europe competing for global gas supplies with a resurgent China certainly does bring the possibility that we see some strength come back into the market once the refilling stage kicks off next month.

Natural gas technical analysis

The monthly US natural gas chart highlights the fact that March/April has often provided bullish turning points after price has seen dramatic periods of downside. The fact that these turning points come as the withdrawal phase (winter) turns back to injection phase (spring) is no coincidence. Nonetheless, it is notable that things often only really get going later into the year as we start heading towards the winter. This could mean that the dramatic declines seen over recent months could soon turn into a new consolidation or recovery phase. Down below, watch for the December 2020 low of $2.264 as potential support. A break below that point would signal expectations of further downside. Also keep an eye on the stochastic oscillator, with a break back up through the 20 threshold signalling a bullish shift in momentum. Looking at the past fourteen years of price action below, it provided four bullish reversals out of oversold on the stochastic. Each of those provided very timely signals of an upward turn for the market. The average recovery seen after seeing a bullish monthly stochastic cross out of oversold is 195%. Clearly this can provide a very important tool to signal an impending upside in price action.

The short-term picture continues to look very bleak, with price action trending within a pattern of lower highs. This week has shown some signs of tentative strength, with price rising up into a deep 76.4% Fibonacci retracement at $2.688. The subsequent selloff has failed to break into a new low, with price starting to show some signs of strength moving into the weekend. However, the bearish trend does remain in play unless price pushes back above the $2.789 swing-high.