Do the Natural Gas Bulls Have a Chance?

Is sub-$3.00 natural gas the new normal?  Can the NYMEX prompt-month contract actually make a rally?  In short, do the bulls have a chance anymore?

This is a question that has been asked to us on more than one occasion, and it’s easy to see why.  Since the beginning of 2016, the NYMEX daily prompt-month settle has averaged $2.796 per MMBtu.  In 2018, the daily settle has eclipsed $3.00 per MMBtu only 16 times, and 15 of those were in the month of January.  The prompt-contract has had a difficult time remaining above the psychologically-important $3.00-per-MMBtu barrier, and $4.00 gas seems like an eternity ago (December 2014 to be exact).  So is there any reason to think the bulls can make a sustained rally in this market?

The simple answer is yes.  The likelihood of it happening is certainly up for debate, and this is by no means a prediction that gas prices will move significantly higher, but there are fundamental factors that could support a move to the upside.  First and foremost, natural gas storage levels are well below their year-ago and 5-year average levels for this time of the year.  During the summer months, natural gas production out-paces demand and excess supply is pumped into storage to be used during the winter months, when gas demand is greater than our production.  Current storage levels are 26 percent below year-ago levels and 20 percent below the 5-year average for this time of year.  This isn’t impacting the current market too much, but that could certainly come later this year as injections turn to withdrawals and winter weather forecasts get released.  

Speaking of weather, this is another fundamental factor that could aid in a move to the upside.  Summer heat increases power generation demand for natural gas, but winter is when weather can really push prices higher.  Natural gas usage is at its highest in the winter months when the fuel is used for heating purposes.  The colder it gets, the higher natural gas demand goes, especially if that cold comes in highly-populated areas such as the Mid-Atlantic, New England, and Upper Midwest.  

Finally, although this one is a bit more of a stretch, production stalling out could add to any bullish momentum.  Currently, rising production is the single most bearish factor for natural gas pricing.  Now over 80.0 Bcf/d, production is at record-high levels and is only expected to continue to rise.  If production stalls out, similar to what happened in the first half of 2017, that flattening could shift production’s impact from bearish to neutral.

Any one of these factors can certainly have an impact, but more than likely a combination of the three would be needed for a sustained rally in gas pricing.  Storage is the most known of the bullish factors, and if the lowered storage levels combine with forecasts for a cold winter in the fall shoulder season, a  move to the upside is certainly possible.  And if production lags its expected growth, that may add to any shift higher.

Again, this is all hypothetical at this time and a run toward $3.50 per MMBtu or even $4.00 gas isn’t being called for.  But there is a case for the bulls to make a bit of a move.  It may be hard to imagine in the current environment, but the NYMEX prompt-month natural gas contract can rally north of $3.00, given the right scenarios.