- Natural Gas demand has fallen heavily as result of COVID-19
- Markets initially tried to rally during the week but there were no buyers in the ring
- Even if home heating demand rises there will be no lasting upside
- The right trade is to short any early Monday bounce
The level of global demand for natural gas has been and indeed, still is, being impacted by the COVID-19 pandemic. However, the impact has not been as dramatic, or as heavily reported as the impact for crude oil. Here I seek to redress that imbalance.
Figure 1 illustrates the corrective channel that has been in place since November 2019. Within this channel Natural Gas futures on the Nymex had another volatile week before closing at USD1.650 on Friday, 0.6% lower than a week ago.
The U.S. Energy Information Administration (EIA), last Thursday confirmed a withdrawal of 19 billion standard cubic feet of gas (Bcf) in working underground stocks for the week ending March 27 and as we reach the end of the withdrawal season natural gas stocks are 77% higher than a year ago and 17.2% above the 5-year average. This has weighed on prices that are already low due to an abundance of liquefied natural gas (LNG) in the market.
Figure 1: Natural Gas Pricing and Technical Sentiment Source: Spotlight Group & www.investing.com
Weather Effects & Lockdown Lethargy
Figure 1 shows that the differential between spot prices and the key moving averages, may not be as deep as seen in the period from May to August last year. However, they are in line with the levels of April 2019 which heralded a seasonal decline. Here is no reason to expect anything different now.
The weather is a factor and while industry may be shutting down, the fact that more people are at home may just impact domestic heating demand to the upside. I do not want to overplay this point as the use of natural gas for home heating is just 17% of U.S. demand cf. 33% for industry, Figure 2.
Figure 2: U.S. Consumption of Natural Gas Source: EIA
It would be easy to say that the weather is turning and that as warmer weather begins to envelope the northern hemisphere it is hard to see a reason for prices to suddenly snap back. However, Bespoke Weather Systems (BWS) report that the first full week of April will be wet and stormy for the East and Southwest while the nation’s heartland turns up the heat.
We cannot ignore the fact that as a direct result of the effects of coronavirus, 80% of American businesses and households are under some form of lockdown and approximately 10 million people have posted new unemployment claims over the past fortnight.
In the short-term, we have to accept that the weather is something of a wild card in our calculations, but at just 17% of gas consumption, the view is that shuttered industry will drag demand down further than domestic demand will boost it.
Indeed, referring to Figure 1, the technical sentiment is such that we see some extremely short-term buying when markets open on Monday, merely coming through as older shorts are covered and then renewed selling will begin quickly thereafter.
Given that neither the U.S. nor Western Europe has any specified time frame for when businesses will return to normal operations it is the most likely scenario that unless there is a sudden spurt of scientific advance the west is headed for a recession.
There is no guarantee that the recovery will be “V” shaped for we see in China, which is at least three-months ahead of the rest of the world in enduring/surviving the COVID-19 crisis the factory rebound will be hampered by a fragile supply chain that is far from fully operational. It will be the same story in the west.
Any Floor For Natural Gas?
A price floor cannot, as yet be identified. In fact, global market demand fundamentals will remain loose through the rest of 2020 and out to the end of Q2 2021.
Figure 3: Technical Levels & Extensions For Natural Gas May 2020 (NGK0) Source: www.investing.com, Spotlight Group
I will look past any early buying and seek further downside in Natural Gas. The chart in Figure 3 has a deep low target at 1.189, however, intermediate targets where one could job in and out so as to secure profits are to be seen at 1.405, 1.336, 1.281 and 1.225.
I would be prepared to hold out against a rising market and not have a stop loss posted until 1.841.