Trading the Fast and Furious Correction Natural Gas
After a historic rally in 2021 and early 2022, the natural gas market has corrected sharply in recent months—this key global commodity is now trading down roughly 60% from its August peak
The historic rally in natural gas prices made this commodity one of the best trades in the financial markets for about 18 months—especially for bulls in the sector.
From the start of 2021 through August 2022, natural gas prices rallied from roughly $4/mmBtu to over $10/mmBtu, representing a return of more than 150% during that period.
The recent correction in the natural gas market has been equally shocking. Since peaking in August, natural gas prices have dropped by about 60%. That includes a surprising 40% drop since mid-December, alone. Natural gas was trading hands at over $7/mmBtu on Dec. 13, but has dropped all the way down to roughly $4/mmBtu as of early January 2023.
The recent slump has been so severe that natural gas is now trading in line with the levels observed before Russia escalated hostilities with Ukraine in early 2022.
The war in Eastern Europe had been largely responsible for the 2022 bull run in natural gas, as supply disruptions and associated shortages created a demand-supply imbalance which served to inflate prices.
Natural gas prices have weakened even with the war in Eastern Europe still raging. As a result, there’s likely a group of market participants wondering whether prices have fallen too fast and too far.
From a qualitative perspective, the recent decline in natural gas prices has been blamed on an expected slowdown in the global economy, as well as a warmer-than-expected winter weather forecast. Both of these factors are expected to weigh on demand in early 2023.
Another factor playing into the price decline appears to relate to an overabundance of natural gas inventories. With many storage facilities at, or near, capacity, there’s less demand for natural gas on the market, which has undoubtedly contributed to recent price weakness, as well.
In Europe, price action in the natural gas markets has mirrored the United States. One of the most-followed natural gas futures contracts in Europe, the Dutch T.F.F, recently dropped to €76 per megawatt-hour. Last year, right before Russia expanded its war with Ukraine, that same contract was trading for €88.
This past August, the Dutch T.F.F. futures contract peaked at a jaw-dropping €340 per megawatt hour. That means the Dutch T.F.F. natural gas contract has dropped by roughly 73% since its August peak, as illustrated below.
A sharp rise in natural gas exports from the U.S. to Europe has contributed to the easing of prices in Europe. In 2022, the U.S. and Qatar both exported 81 million tons of liquefied natural gas (LNG).
In order to be prepped for transport, natural gas must first be liquified and then pumped into specialized LNG carriers. Liquified natural gas is roughly 600 times denser than naturally occurring gas, but it also takes up far less volume.
Qatar has long been one of the world’s top exporters of LNG, but the U.S. has ramped up its LNG exports in exponential fashion since 2016. Prior to that, the U.S. was almost non-existent in the LNG export market.
The surge in LNG exports from the U.S. also served to push up transoceanic shipping costs for this key global commodity. Last fall, the cost to lease a transoceanic natural gas carrier shot above $400,000 per day, representing an all-time high in this contract. At the start of 2022, the cost was closer to $20,000 per day.
Considering the recent decline in natural gas prices, it’s possible that transoceanic freighting costs could also pull back. Data from 2022 indicates that 70% of the natural gas exports from the U.S. were delivered in Europe.
To track and trade the natural gas sector, readers can add the following symbols to their watchlists:
- Antero Resources Corp. (AR)
- Cabot Corporation (CBT)
- Cheniere Energy (LNG)
- Chesapeake Energy (CHK)
- Chevron Corporation (CVX)
- Enbridge (ENB)
- EQT Corp. (EQT)
- Kinder Morgan (KMI)
- ProShares Ultra Bloomberg Natural Gas (BOIL)
- ProShares UltraShort Bloomberg Natural Gas (KOLD)
- Range Resources Corporation (RRC)
- Southwestern Energy (SWN)
- United States 12 Month Natural Gas Fund LP (UNL)
- United States Natural Gas Fund LP (UNG)
To learn more about trading the natural gas sector using ETFs, check out this new installment of Options Jive on the tastylive network.
To follow everything moving the markets in 2023, monitor tastylive, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.
