Natural Gas News: Market Stays Bearish Despite LNG Supply Risks Abroad

Natural Gas Slides to a Five-Week Low as Bears Stay in Control

May natural gas futures settled at $2.800 on Thursday, down $0.019 or -0.67%. Prices are now at their lowest level since mid-January and the entire winter storm Fern rally has been erased. The global supply disruptions from the war aren’t doing enough to offset what’s happening domestically.

Qatar and the Strait Are a Long-Term Story, Not a Near-Term Catalyst

The war is creating real LNG supply problems but not for the U.S. market right now. Qatar’s Ras Laffan facility took a hit and about 17% of its export capacity is offline. That matters because Qatar handles roughly 20% of global LNG supply and repairs could take years. The problem is that’s a long-term story and the nearby futures contract is trading on what’s happening today.

Not only is output in the region an issue, but what little is being produced is having trouble reaching European and Asian customers because of the closure of the Strait of Hormuz. In my opinion, this situation could gradually boost demand for U.S. exports as buyers search for alternative supply sources.

Recent data showed that weekly LNG flows have already risen 2.7%, showing early signs of stronger export activity, but this amount represents maxed out capacity. To put it another way, the U.S. can’t meet all the new demand from Europe and Asia because it doesn’t have enough LNG plants, and what it has is producing as fast and as much as it can. The only solution is to build new LNG plants.

So what we have is a situation where despite these supportive factors, they haven’t been strong enough to offset domestic oversupply. And that’s usually bearish for prices, especially at this time of year, when domestic demand is low and production is high. The current bearish price action actually shows that the U.S. market is treating the global disruptions as a longer-term story rather than an immediate bullish rally driver.

Record Production and a Rising Rig Count Are Keeping a Lid on Prices

Domestic supply remains the biggest obstacle for any sustained rally by the near-term futures contract. In this current data driven market, U.S. dry gas production is holding at 111.8 bcf per day, up 4.7% from last year and threatening record highs. Prices are currently challenging the low of the year because steady output keeps storage levels elevated and caps rallies.

Another factor contributing to the bearish outlook is this week’s rise in the rig count. Baker Hughes reported that the rig count rose to 130 this week. What this means is producers are expanding activity even in a low price environment. Additionally, the U.S. Energy Information Administration (EIA) upwardly revised its production forecast. This served as further proof that supply will keep increasing over the near-term.

Shoulder Season and Injection Season Arrived at the Same Time

And let’s not overlook the bearish seasonal factor either. We just entered the shoulder season, which typically means weaker demand. This bearish outlook could continue into late May. Last week on April 1, the injection season began too, so storage is expected to build, further pressuring prices.

Technical Outlook

The trend is down and prices are closing in on the January 15 low at $2.689. That’s the next major target. Resistance is stacked above at $3.060, $3.067 and the 50-day moving average at $3.120.

The drop from the January 30 high at $4.075 to where we are now tells you everything about this market. It took three months to build that rally and about six weeks to give it all back. Rallies are going to get sold until the fundamentals change.

The Bear Case Stays Intact

Strong production, rising storage and weak seasonal demand are still running this market. The global supply story from the war isn’t strong enough to change that right now. Unless LNG exports make a meaningful jump or the weather turns cold, this market has no reason to rally. Every bounce is a selling opportunity until something changes.

More Information in our Economic Calendar.