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.
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NATGASUSJUL20 - Natural Gas, front month
NGV0 - Natural Gas, October 2020
NGX0 - Natural Gas, November 2020
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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.
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.
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.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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