Natural Gas drops after EIA storage data beats estimates
- Natural Gas starts a leg lower on intraday charts after Natural Gas Storage data showed an unexpected rise in inventories.
- The commodity had been recovering amid a weaker US Dollar and heatwave demand.
- Norwegian outages continue to ravage the supply outlook and further underpin already low prices.
- If temperatures across the Western world continue to remain elevated, Natural Gas could see further gains, according to analysts.
Natural Gas price starts declining on Thursday after Natural Gas Storage Change data from the Energy Information Administration (EIA) shows a suprise rise in inventories, indicating robust supply. Gas prices have been recovering due to a mixture of a weaker US Dollar and hotter-than-expected summer weather in the Western world. Temperatures in Texas, for example, are breaking records and the trend is set to continue for 7-10 days, according to forecasters. If the summer is hotter overall, it will quickly put pressure on Natural Gas supplies used in air conditioning, according to a report by Natural Gas World.
XNG/USD is trading at $2.637 MMBtu, at the time of writing, entering the US session on Thursday.
Natural Gas news and market movers
- EIA Natural Gas Storage Change data shows a rise to 95 billion cubic feet (bcf) rise in the week to June 16, when a lower 91 bcf had been forecast from 84 bcf recorded in the prior period.
- The data suggests robust supply in the US and as a result Natural Gas prices take a fall.
- Yet overall unexpectedly warm weather witnessed in much of the west keeps demand high for Natural Gas, which is used to power air conditioning. This is a supporting factor for prices, according to Natural Gas World (NGW).
- “Weather is unpredictable and our forecasts are conservative as a result, so if temperatures are warmer than the three-year average, gas for power demand averages will be higher than expected,” NGW reports.
- The US Dollar declined following US Federal Reserve (Fed) Chairman Jerome Powell’s testimony to the US Congress on Wednesday, giving Natural Gas a boost, as the commodity is mainly priced and traded in the world’s reserve currency.
- On Thursday, however, the US Dollar is recovering amid strong housing data and the second day of Powell’s testimony.
- Gas prices have rallied over recent weeks due to concerns regarding Norwegian supply after longer-than-expected outages reported at Gas plants in Norway.
- Norwegian supply is now critical to the European continent after it replaced Russia as the main supplier in 2022, when Norwegian Gas accounted for 23% of imports compared to Russia’s 15%, according to a report by CNN.
- “The European gas market — and by extension the global gas market — [is] certainly not out of the woods in terms of adequately matching supply with demand,” Tom Marzec-Manser, head of Gas analytics at ICIS, told CNN.
- Yet at the same time, European storage facilities remain relatively high. They are now 73% full — a much higher level than the 56% averaged at the same time of the year over the past five years, according to data from Gas Infrastructure Europe (reported by CNN).
- In addition, news of a deal between Romanian Gas operator RomGaz and Southeast European Gas producer Petrom OMV to build a new Natural Gas terminal in the Black Sea is likely to ease regional demand concerns, according to Offshore Energy.
- The Neptun Deep offshore Gas field will make Romania the largest Gas producer in the EU and a net exporter.
- Asian rivalry for Europe’s limited supply is likely to be less than in previous years, after Japan and South Korea recorded much higher stores, and the Chinese economy continues to falter after coming out of a prolonged lockdown.
Natural Gas Technical Analysis: Pulling back within a broader downtrend
Natural Gas price is in a long-term downtrend since turning lower at the $9.960 MMBtu peak achieved in August 2022. That said, bearish momentum has tapered off considerably since February 2023. This is evidenced by the bullish convergence of the Relative Strength Index (RSI) momentum indicator with price, beginning in May 2023. Bullish convergence occurs when price makes new lows but RSI fails to copy.
Natural Gas would need to break above the last lower high of the long-term downtrend at $3.079 MMBtu, however, to indicate a reversal in the broader trend.
As things stand, a break below the $2.110 MMBtu year-to-date lows would provide a signal for a continuation down to a target at $1.546 MMBtu. This target is the 61.8% Fibonacci extension of the height of the roughly sideways consolidation range that has been unfolding during 2023.
On the daily chart, it can be seen that price is going sideways, although it has now broken above both the 50 and not the 100-day Simple Moving Average (SMA), which is a short-term bullish sign.
The four-hour chart shows the pair has temporarily reversed its prior short-term uptrend.
The steep decline witnessed on Tuesday broke below the last lower high at roughly $2.650 and could spell a change in direction for Natural Gas in the short term.
The recent cliff-edge decline from Tuesday’s highs was not the flag pole of a bearish flag pattern as originally speculated. Price has recovered too much for it to be a bear flag. What is more likely is that the initial decline could be the ‘A’ leg of an ABC correction, with the rebound on Wednesday leg ‘B’ and a move down expected when wave ‘C’ finally unfolds.
Wave C is likely to be at least a Fibonacci 61.8% length of wave A, suggesting a possible end target in the short-term of around $2.450.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.