In December 2015, Natural gas hit a new inflation-adjusted historically low price of $1.68 per million British thermal units on the New York Mercantile Exchange. Based on the higher than normal temperatures forecasted by the meteorological department, some analysts expect the price to touch new lows. The peak demand for gas in the US begins in November and ends in March.
Record-high stockpiles and lower heating demand in December has resulted in a decline in the price of natural gas by about 20% so far in 2016. On Wednesday, natural gas for March delivery closed at $1.78 per million British thermal units in the NYMEX. According to the data from the Energy Information Administration (EIA), the natural gas storage in the US fell by 158 billion cubic feet last week.
The analysts’ expectation was a decline of 154 billion cubic feet. The total US natural gas storage stood at 2.706 trillion cubic feet, up 19.7% on a y-o-y basis. This has led to the claim that there will be too much gas left in storage in March. A careful analysis of the data will present a different scenario altogether.
Since September, the production of natural gas has come down by 1.2 bcfd. The production increases claimed by EIA are y-o-y comparisons, which do not reflect the prevailing scenario of the last four months. The price of natural gas is currently less than half of what it was in early 2014.
Furthermore, the hedges made when prices were in the $5 plus range allowed many entities to manage falling prices and rake up production without any restraint. Such hedges, no longer exist.
Conventional gas contributes to almost half of the US supply and is on a terminal decline. Since July 2008, conventional gas supply has decreased by 16.75 bcfd. The conventional gas supply is forecasted to decrease by 5% per year. To compensate for the loss, the production of shale gas should increase by 15 bcfd per year. The shale gas production was initially expected to offset those losses.
Now, shale gas production is also declining as producers are unable to meet the costs. The shale gas production decreased from 18 bcfd in 2014 to 14.5 bcfd in 2015. The shale gas production is currently declining at the rate of 0.72 bcfd (or approximately 2.2bcfd on an annualized basis) every four months. Export plans of 7 bcfd by 2020 will only act as a support for further increase in the prices.
Above all, between 2013 and 2014, the market had a lot of liquidity. However, it is completely different now. Producers will have a tough time in arranging capital to speedup up the drilling process. Obviously, the only option now available is a revival in the price of natural gas. The EIA has forecasted a price of $3.17 bcfd by December 2016. Thus, fundamentally, the price of natural gas is expected to rise in the coming months.
Technically, as shown in the image below, the price of natural gas has support at $1.775.
Minor and major resistance exists at $1.844 and $1.909. The stochastic indicator reflects an extremely oversold scenario. Thus, a binary options trader should purchase a call option with March-end expiry. The suggested strike price for the call option is $1.85.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
