Natural Gas Prices Forecast: Can Oversold Market Sustain Lower Levels?

Natural Gas Market Weekly Recap

In the past week, U.S. natural gas markets witnessed a continuation of the downward price trend, reaching levels not seen since mid-2018. This decline, though showing signs of deceleration, was set against a backdrop where producers are contemplating drilling cutbacks in 2024 after a steep decline in prices to a 3-1/2-year low.

Despite these potential cutbacks, industry analysts maintain that overall gas output might not significantly diminish. This is due to profitable oil prices in prominent shale regions like the Permian in Texas and New Mexico and the Bakken in North Dakota, where natural gas is often extracted alongside oil.

The market’s struggle has been compounded by a combination of near-record gas production levels, consistently mild weather patterns, and a consequent decrease in heating demand. This confluence of factors has led to utilities maintaining higher-than-normal gas inventories, estimated to be about 22% above the average levels for this time of year.

Technically, the natural gas market has been in an oversold state for an extended period, reminiscent of trends seen in February 2018. Over the past week, futures were down by approximately 13%, adding to the consecutive declines of 11% and 23% in the preceding weeks.

Natural Gas Market Weekly Forecast

The market outlook remains predominantly bearish for the following reasons:

1. Persistent Mild Weather: Forecasts continue to predict mild weather conditions, which are likely to sustain low heating demand through the early part of March.
2. Robust Production Despite Drilling Cuts: While some energy firms are planning to reduce their gas drilling operations, the high profitability of oil extraction in shale basins could inadvertently keep gas production robust, further contributing to the surplus.
3. High Inventory Levels: The current storage levels, significantly higher than usual, pose a considerable challenge in rebalancing the market.

Considering these market conditions, it is expected that natural gas prices will continue to be low. Any possible increases in price are likely to be brief and restrained due to the prevailing situation of abundant supply and muted demand.

Technical Targets

From a technical standpoint, several key support levels are crucial in the current market environment. These include the psychological level of $1.50, followed by historical lows such as $1.432 and potentially $1.25, levels not seen since the early 1990s.

Strategic Considerations

For traders, monitoring production trends and inventory levels will be key. The market’s current position and the ongoing liquidation of futures contracts suggest a collective belief that the peak demand season for winter is effectively over.

This prevailing sentiment, coupled with an absence of strong bullish factors, indicates that natural gas prices may stay at lower levels for the foreseeable future. Traders might find short-term bearish strategies more advantageous, while remaining vigilant for any market shifts that could signal a change in the prevailing trend.