Clearly, the hottest commodity market has been natural gas, with prices more than doubling between June and October. This was led by a shortage in Europe from strong air conditioner use, persistent setbacks in wind production, and the lack of a significant recovery in global production. The weekly rig operating count has shown only a modest increase from its steep decline in 2019 and 2020.
A more recent catalyst for the rally has been the shortage of coal in China, which combined with the increase in prices in Europe adds to the bullish environment in the petroleum complex, as more is needed for generating electricity.
In the early stages of the rally the trade focused on expectations of significant tightness into the northern hemisphere heating season, with US storage running at 5-8% below the 5-year average levels. That deficit has narrowed considerably over the past six weeks, which is to be expected given the decline in demand during the shoulder season between summer cooling and winter heating. We expect large injections to continue into the beginning of November, which could result in pullback in natural gas prices. We suspect China will be able to increase its coal deliveries, which could also create a temporary drop in demand for natural gas.
Source: Baker Hughes & Bloomberg.
Regardless, there is still a worldwide shortage of liquified natural gas (LNG), and recent high prices could encourage some hoarding. Surging prices should also facilitate further expansion of US LNG exports, which could temper injections into domestic storage. Speculators hold a significant net short position, which should limit selling and stoke short covering if prices regain key technical levels after a selloff. We suggest traders look for a large break in the coming weeks to reposition themselves for a resumption of a bull trend next month.
Source: EIA
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Originally Published on October 8, 2021
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