Natural gas stocks on route to challenge capacity

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  A mild winter followed by the global pandemic have cut demand for natural gas across the world. The result being low prices from the U.S. to Europe and Asia. At the current pace of stock build the U.S. market risks hitting capacity in four months time.


What is our trading focus?

NATGASUSJUL20 - Natural Gas, front month
NGV0 - Natural Gas, October 2020
NGX0 - Natural Gas, November 2020

____________________________________________________________________________________________________

Global natural gas prices continue to struggle with an overhang of supply weighing on the market. Following a prolonged period of below normal demand, US and global inventories have built to a seasonal high level. The recent mild winter across the Northern Hemisphere was followed by the Covid-19 pandemic, both reducing demand from consumers during the winter and more recently from industrial users during the lockdown period.

While crude oil has been sent on the road to recovery on a combination of OPEC+ production cuts and a revival in global demand, natural gas prices in the U.S. and Europe may stay under pressure during the coming months as stock piles continue their seasonal build, potentially towards capacity.

U.S. natural gas futures for delivery in July trade just above support at $1.60/MMBtu ahead of the March low at $1.52/MMBtu. Without a strong pickup in demand due to warmer weather or increased industrial demand, the short-term risks point to lower prices still.

Source: Saxo Group

Later today at 14:30 GMT, the weekly inventory report from the U.S. Energy Information Administration is expected to show a stock build last week of 84 billion cubic feet (bcf), just slightly below the five-year average for this week at 87 bcf. A build of this size will bring total gas in storage to 2.9 trillion cubic feet (tcf), some 18% above the five-year average. The charts below show the developments which have led to the current weak price action.

While consumption has been hurt by weaker industrial demand during the pandemic, production has  also suffered a setback due to the rapid reduction in U.S. shale oil production. Unfortunately a rising venue for demand, i.e. exports of LNG, has also seen a sharp reversal with lower gas prices across the world reducing the profitability of exporting LNG when taking the cost of transportation and liquefaction into account.

Source: Bloomberg and Saxo Group

Just like WTI crude oil briefly collapsed into negative territory back in April when Cushing, the delivery hub was close to hitting capacity, the current trajectory of natural gas in storage highlights the challenge the market may face over the coming months. Following the seasonal path of stock builds, natural gas in storage is currently on route and at risk of hitting capacity before end October 2020 when the winter withdrawal season kicks in. The risk of forced production shut ins are likely to keep the price under pressure during the coming weeks, unless a prolonged heatwave arrives to lift demand for cooling.

One way to track the potential stress in the market is by following the spread between the October (NGV0) and November (NGX0) futures. The spread is pricing the transition from injection to withdrawal and currently it is trading at a very elevated -41 cents/MMBtu. A year ago the same spread for 2019 traded at -8 cents before expiring close to flat last September.

Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.