In retrospect, it was very surprising to see natural gas prices fall from $10 in August to $5.30 by October given the threat of a shutoff of Russian energy exports. Record US gas production, near-maximum US export flows (until a fire at a Freeport export facility in early June reduced capacity), and an all-out effort by Europe to secure alternative supply via seaborne deliveries more than offset the reduction in Russian pipeline deliveries and allowed storage on the Continent to reach official pre-winter targets. Mild temperatures this fall have also contributed to the price slide.
Not surprisingly, the selloff pushed the spec and fund position to its shortest level since March 2020, back when COVID was declared a pandemic and there were concerns about a global depression. Bearish sentiment has again reached extreme levels, and prices remain roughly $0.70 above where they were just before Russia invaded Ukraine.
With mild US and European temperatures forecasted into the second week of November, the US injection season likely to continue for two more weeks, and US exports not expected to return to near capacity until mid-November (following a restart of the Freeport facility), the bear camp should retain an edge for a while.
Beyond the middle of November, demand fundamentals should improve, and we would expect to see the US working gas in storage deficit to the 10-year average start to widen again. There were reports this week that tankers were starting to move into position at the Freeport facility.
We see the potential for a key bottom in natural gas, with risk to the bear camp rising significantly over the next 30 days. The odds of Putin sending a shock wave through the natural gas market this winter are strong.
Originally Published October 28, 2022
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