Find out if the price of natural gas is about to rise

Written by: Robert Bell
April 3, 2020
  • Natural gas price had bene predicted to rise
  • The coronavirus effct has kept prices down
  • This commodity should recover in time, but the timescale is unknown

Natural gas is traded on the futures market at the New York Mercantile Exchange, under the Henry Hub name.

With stock markets around the planet crashing heavily this week, many investors are wondering where to turn to commodities. In the case of natural gas, let’s take a look at the different factors involved.

The current price

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At the time of writing,   the price of natural gas is $1.781 (£1.47) per million British thermal units (MMBtu). This is down from $1.86 a few days ago and $1.93 before that, but the market has seen nothing like the dramatic losses that we have witnessed on the stock markets.

At the start of 2020, the price of natural gas was sitting at $2.189, having been at $2.862 in early November, so it has fallen in recent months during a volatile period.

The last time that gas was as cheap as it is now was in March 2016.

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Falling demand

This price loss is largely due to falling levels of demand. This is mainly due to higher than average temperatures in many parts of the world leading to less need for space heating, as pointed out by the Energy Information Administration (EIA). Residential and commercial consumption have both slumped.  

Lower consumption rates in the industrial sector are also playing their part. With many companies grinding to a halt due to the coronavirus outbreak, the consumption of energy commodities is expected to fall this year.

It is still too early to predict the overall effect of this situation. Gas seems to be coping with the crisis better than most markets, but there is no doubt that a battle between the bulls and the bears has seen volatility levels increase.

High levels of gas supplies held in storage are also keeping the price down. With this amount set to increase this year, it is another factor to keep an eye on. 

There has been talk of the US government stepping in to help the country’s natural gas companies, many of whom are said to be heavily in debt and struggling to survive. The closure of some of these firms could lead to a severe shortage of gas and rising prices.

The Outlook

We saw earlier that the EIA blamed warm temperatures for the fall in demand for natural gas. Yet, in the same report they also said that they expect prices to rise in the 2nd quarter of this year.

They estimate a price of $2.22/MMBtu by the time that the 3rd quarter comes around. Then, they expect a further increase in 2021, to give an annual average of $2.51/MMBtu.

Part of this prediction comes down to the expected decline in production rates. The Appalachian and Permian regions of the US are especially prone to this, as the current low price is discouraging companies from producing more gas here.

The resistance level is at about $2 or a little bit lower. The general feeling is that natural gas has been under-priced for some time.

In a normal market, the EIA prediction for increases in 2020 and 2021 would make this a solid purchase. However, the coronavirus fears mean that the price could drop again before it rises.

This is a volatile commodity that is best viewed as a long-term investment right now, rather than a way of getting hold of some quick profits.