Insights

Natural gas: buy, sell, or avoid?

By Paul Reid

24 January 2024

XNGUSD natural gas trading 2024

In this article, we will cover Exness opinions alongside reporting from The Wall Street Journal, a commercial partner of Exness.

In 2022, natural gas prices soared to record highs of $9.12 (USD) per million British thermal units (MMBtu). It was a time of intense demand and tight supply. But then, in 2023, something unexpected happened. Prices plummeted. Why?

First, let's talk about the weather. Our sun has a cycle of approximately 11 years, during which its activity affects our climate. The solar cycle begins with a period of low activity, called the solar minimum, progressing to a period of high solar activity, the solar maximum. We will experience the peak of the solar maximum throughout 2024 and 2025.

Add to that El Niño 2024, a naturally occurring climate pattern that causes the Pacific Ocean to become warmer than usual.

This climatic double-whammy resulted in a very mild winter last year — and this one is shaping up to be warmer than usual too. This means less demand for heating, so less demand for natural gas. But there's more to the story than just the weather.

In addition, the US ramped up its natural gas production to record levels. The increased global inventories and current low demand are driving prices down, but will it stay low in the coming weeks?

With conflict expanding across the Middle East, it’s possible that supply chains may break down soon and prices may rise. Currently, XNGUSD is at a rock-bottom price of $2.11, and a rebound looks quite overdue on the chart, but should you buy? 

The Wall Street Journal recently dived deep into this, and it’s something every commodity trader should know about. Read on to trade informed.


Houthi Attacks Won’t Threaten Global Natural-Gas Security

The threat to commercial shipping is snarling supply chains—but global energy markets look very different than in 2022

By Megha Mandavia

U.K. military jets return to base in Cyprus after joint strikes with the U.S. against Houthi targets on Monday.

Winter is warmer than usual in Northeast Asia and the Chinese economy is cooler. One result: prices of liquefied natural gas are chilling quickly and will probably remain muted. Unlike 2022, when shipping and natural gas pipeline disruptions thrust Europe into an energy crisis, high inventories and muted Asian demand in 2024 make a repeat unlikely. 

That is despite escalating Red Sea tensions bottling up global shipping—including a new strike against Houthi militants by U.S. and U.K. forces Monday. Qatar, one of the major LNG suppliers in the region, has decided to avoid the Red Sea.

Asian LNG prices have fallen over 40% to $9.41 per million British thermal units (MMBtu) in the past two months, according to Refinitiv. Over the past year they have more than halved. Prices in Europe initially jumped in October when the Houthi attacks began, but have also since retreated back to around $9 per MMBtu—roughly where they sat last summer.

Apart from the mild winter and high LNG inventories, demand for LNG in 2024 will probably be limited by competition from Russian piped gas in Asia, and abundant coal supplies. A halting recovery in China’s energy-intensive heavy industry will also help keep a lid on prices.

China and Japan are the world’s largest LNG importers. Qatar is a major supplier: Qatar sends more than 80% of its LNG to Asia, according to Rystad Energy, but not via the Suez Canal. Qatari supplies will have more trouble reaching Europe, but with the U.S. now a significant LNG exporter—and European inventories still ample—that is less of a problem than it might have been in the past.

Per Rystad data, storage levels are at 78% in Europe and close to the upper edge of the 5-year range in South Korea and Japan. Higher-than-expected winter temperatures until almost the end of December 2023 have limited inventory drawdowns in major importing countries such as Japan, South Korea and China, according to Argus Media. 

Asian LNG demand is projected to increase by 5%, or 12 million metric tons, this year, following a 2% rise in 2023, according to the consultancy Wood Mackenzie. 

Nuclear is another factor. According to Anu Agarwal, Asia head of LPG at Argus Media, an uplift in nuclear availability has also further limited the amount of spot LNG needed in Japan and South Korea this winter. The longer-term supply picture for Asia also looks ample: Russia aims to increase gas supplies to China via its Power of Siberia 1 pipeline to 38 bcm annually by 2025.

Two years ago, when Russia attacked Ukraine, LNG prices took a trip skyward as Europe sought any and every alternative to piped Russian gas. LNG is sitting the current conflict out.


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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.