Natural Gas 30% higher in November

Natural gas prices soared 30% in November as U.S. exports to Europe conflicted with the weather forecast but have since subsided.

Betting on the weather

Natural gas prices in the U.S. were elevated through the summer from concerns over global supply problems due to the ongoing war in Ukraine. Consumers and industry rushed to lock in supply. But in early autumn, it appeared that the opposite situation was forming. Europe had ordered so much gas that dozens of LNG tankers were waiting to unload offshore. However, after a month of unseasonably cold weather, demand has picked up again, and reports are that the backlog has been cleared. U.S. natural gas spiked 30% higher but has since settled at around 9% today, Wednesday 30th.

The European benchmark for natural gas prices is lower than at the end of October. U.S. prices have increased substantially over the same period. Of course, the market conditions in both economies are different, but so is the weather. The long-term projections from NOAA indicate that much of the U.S. will be warmer than average this year. But, due to La Nina for an unusual third consecutive year, much of the country could face renewed drought conditions.

Peaking power over heating power

In the U.S., natural gas is used for heating, but the prevalence of use is not geographically uniform. Natural gas for heating is more common in the west and north-central regions of the country, where temperatures are expected to be unseasonably lower this year. Warmer weather conditions in the south might not reduce demand as much as colder weather in the north would increase demand.

The other issue is that over one-third of natural gas consumed in the U.S. is for electricity generation, while only 15% is for residential. Due to the drought last year, hydropower production was 16% below average, and natural gas took up the slack, reaching the highest consumption level ever last year. Another low-rainfall winter would only exacerbate drought conditions and require even more natural gas to stabilise the electric grid. Of course, anything can happen with the weather.

Natural gas in a bear flag

The pattern depicted in the prices of natural gas resembles a bear flag, revealed by the troughs and peaks preceded by a bearish impulse. Aside from the downward-looking trend, the commodity seems to have bounced off at $5.30/cf (S2) in a double-bottom fashion. If the base cracks, $5.00/cf (S3) becomes a support above $3.50/cf (S4). $6.50/cf (S1) is the make-it-or-break-it level to keep a close eye on in the short term. Inversely, the break above the peak of $8.20/cf (R1) will expose $9.20/cf (R2) and $10.00/cf (R3), as it was missed for a few cents back in August.

Key takeaways

Natural gas prices in the U.S. have been volatile due to concerns over global supply and demand and weather forecasts. Prices spiked 30% in November but have since settled at around 9%. European prices for natural gas are lower than at the end of October, but U.S. prices have increased substantially over the same period. The long-term projections from NOAA indicate that much of the U.S. will be warmer than average this year, but there is a possibility of renewed drought conditions due to La Nina and increased demand for natural gas for electricity generation in colder parts of the U.S.