Natural gas prices: forecasts for 2021
Commodity markets can be of interest to investors for many reasons. They inform us, in particular, about how other financial markets may develop in the more or less near future. Intermarket relations mean that the rise or fall of prices in a given commodity market affects prices observed in other markets (stocks, bonds, currencies, etc.). In this article, we are interested in natural gas as a raw material for the energy sector. This is an important sector of the economy. Due to its role in the production of electricity, it affects both the production of goods and services and consumption.
Natural gas forecasts for 2021
Use of natural gas
Natural gas is a gaseous mixture of hydrocarbons. Methane is the main component in its composition. But this mixture also includes a number of higher alkanes. It may also contain small amounts of gases such as carbon dioxide, hydrogen sulfide or helium.
Natural gas is mainly used to generate electricity and heat. For this reason, natural gas consumption is generally higher in winter. At this time, the need for heating is the highest.
Natural gas is also used for air conditioning. Thus, consumption can also increase significantly in summer, in very hot weather. Global warming should lead to an increase in this trend.
Finally, natural gas can be liquefied. This liquid form is often given to facilitate the transportation of natural gas by sea. Therefore, liquefied natural gas (LNG) is especially popular among exporting countries. This allows them to sell their resources to importing countries.
What financial instruments can be used to bet on the rise or fall of the price of this commodity? The New York Mercantile Exchange (NYME) is used to trade the Henry Hub natural gas, which is the natural gas of North America. On the Trader Workstation platform, you can view a chart that allows you to follow the change in the corresponding price by entering the initials NG. The value of this contract is expressed in dollars. It determines the price per million BTUs (one million BTUs corresponds to approximately one thousand cubic feet). The market is open six days a week, 23 hours a day with an hour break every business day at 5:00 pm (ET). The specifications of this contract are as follows:
You can also invest in sector ETFs. The ETF that trades North American natural gas is called the US Natural Gas Fund (UNG). But there are other ETFs associated with this market. Among the most famous, we will be interested in: ProShares UltraShort Bloomberg Natural Gas (KOLD), ProShares Ultra Bloomberg Natural Gas (BOIL) and the 12-month US natural gas fund (UNL).
With regard to the shares of companies that extract or exploit natural gas, we can refer to the shares of BHP Group Ltd (BHP). Antero Resources Corp (AR) and Phillips 66 (PSX) are also listed on the New York Stock Exchange. Finally, we can of course use options with these ETFs, these futures or these stocks as the underlying asset. If you want to go long in this market, you can use a bullish options strategy such as the bullish put spread, for example. If you want to go short, you can use, for example, a bearish strategy such as the bearish call spread.
Since August 2020, the price of natural gas has risen sharply. Indeed, the price of the corresponding futures contract is currently approaching $5 as shown in the daily chart below. Last month, he scored 11.83%. Thus, it recorded its fifth bullish month in a row. Since the beginning of the year, every month in this market has been bullish, except for March. This represents an increase of 66.7% between the beginning of January and the end of August.
On the daily chart of the NG futures contract, we see that prices are moving back inside the Keltner bands (gap by 1 ATR) after rising above this channel. At first, we can expect a recovery in this overbought market. But after this correction, the price should start to rise again. At least this is indicated by the strength of the recent rally. At the same time that prices made new highs, the MACD histogram hit a three-month high (see our red circle). When prices and a technical indicator make new highs or lows at the same time, this convergence usually signals the health of the current trend.
If we accept the scenario of the price returning to its moving average, then the question becomes the following. To what level can a rollback occur? If we take into account the bullish move that started on March 18, 2021 and peaked on September 3, we can draw different Fibonacci retracement levels. Note that the 23.6% level is slightly above $4.20. Thus, the price can benefit from the support zone at this price level. If the price manages to break below $4.20, it could again hit the support line near the 38.2% Fibonacci level. This last level is just under $4.
Short and medium-term forecasts
How will prices develop in this market by the end of the year? According to our technical analysis, the price of natural gas could return to $4.20 or $4 in the short term. But if the United States were to get colder just before the dead of winter, we would undoubtedly see a surge in prices that could be multiplied by 1.5 or more.
Unpredictable events can also affect prices. Recently, Hurricane Ida almost completely stopped natural gas production in the Gulf of Mexico. Analysts say it will take weeks for the gas sector to be fully operational again in this part of the world. In general, the lack of supply before demand has been felt in this market for several weeks. A recent report from the Energy Information Agency highlights this imbalance. And it is unlikely that the increase in supply will come at the expense of reduced exports of liquefied natural gas. Analysts expect exports to remain strong this winter. Because the needs coming from Europe and Asia must remain important.
The cessation of production in the Gulf of Mexico is undoubtedly temporary. But this further exacerbated the already existing disproportion between supply and demand. However, this inequality speaks in favor of rising prices. Under these conditions, it is difficult not to expect growth in excess of $5 in the medium term.
The level of demand this winter is hard to predict. These difficulties are further exacerbated in 2021, during the coronavirus pandemic. No one knows how cold the winter will be and how high the need for heating will be. It is also unclear whether the new travel bans will dampen economic activity. For example, new restrictions in China could have a significant impact on global gas demand. However, we know that the level of US inventories has been falling for several months. The weakness in US inventories can be attributed, in part, to increased exports of US liquefied natural gas. The price of LNG has reached such levels that companies are more interested in condensing their natural gas and converting it to a liquefied state for export than in accumulating natural gas reserves.
Stocks tend to build up over the summer. This is the time when we add to existing stocks to meet the increase in winter demand. If demand were to reach exceptional peaks between November and March, low inventories might not be able to keep up with such demand and prices would shoot up again. Then we could see the price go over $10.
The volume of options with natural gas as the underlying asset shows that the derivatives market is betting on strong growth. On the one hand, the expected volatility of the November and December cycles is above 60%.
In addition, the open position of call options (call) and put options (put) provides an interesting indicator. In the cycles of the winter months, there are more calls than puts. However, a call on NG Future is a contract that gives the buyer the right to buy that futures contract at a predetermined strike price (for example, $4). When buying a call, the buyer hopes to buy at the strike price an asset whose market price will increase and become higher than the strike price. Thus, more calls than puts indicate that the options market is bullish on the price of natural gas.