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Natural gas futures: our momentum trade of the year rolls on


Already designated by The Armchair Trader in previous coverage as the momentum trade of the year, natural gas futures are on a roll that does not seem to be in danger of stopping. Prices are rallying again from the dip we saw 21-22 September, and are now closing on the high of 5.639 we saw 15 September.

This was the previously established peak, and at time of writing natural gas was at 5.356 with strong upward momentum.

Natural gas futures have doubled in price since March

Natural gas futures have doubled in price since March and have really not taken a breather. It has been the commodity trade of the summer and as we move into the colder winter months in the northern hemisphere, it is begging the question – can gas keep this up?

Outside tactical trimming of positions ahead of the expiration of October options, natural gas is being driven by some underlying fundamentals. Demand earlier in the month was more muted than the average, possibly due to warmer September weather.

US gas production is down, we have seen some disruption of offshore Gulf of Mexico production due to hurricanes, as mentioned in previous analysis on this site. But the big squeeze seems to be coming from gas supplies in Europe and Asia. For UK traders, this is what is pushing up the cost of domestic British gas prices.

The US gas industry has been selling some of its liquified natural gas (LNG) reserves into the overseas market where prices have been very high. But analysts think this could have a knock on effect now on US natural gas futures prices as we move into Q4.

Other factors have included the pick up in economic activity. A hot summer in the US has also increased demand. This is why prices have been moving over the summer months, well before we saw any hurricane disruption. The pandemic has also played a role in curtailing gas production, and while more North American production capacity is coming online now, the demand is picking up too.

Gas production has remained in the low 90s Bcf/d for most of 2021, which is well south of pre-pandemic production levels. Storage levels of natural gas are also lower this year, which points to yet further upside on this trade over the winter months. There are concerns that there could be some real shortages of gas in the northern hemisphere if supplies prove insufficient.

A US Energy Information Agency report on 17 September noted that natural gas stocks there are well down on where they were a year ago (3082 Bcf versus 3671 Bcf 12 months before). The five year average is 3311 Bcf.

Gas inventories still low going into winter

Some US analysts are now predicting gas inventories will be almost 10% lower than the starting levels going into last year. And the situation in Europe is even more dire, with storage levels at 73% of capacity and over 13% lower than they should be. This is pointing to a massive squeeze in the natural gas market which could push prices much higher over the European winter months.

Some things to watch as we move into the winter: the weather is obviously going to play a big role, with colder weather pushing up heating demand. Further hurricane activity could disrupt US offshore gas production. In Europe much will also hinge on Russia, which does have the capacity to pump more gas into the market if prices get high enough to warrant it. This could affect US natural gas futures, as it would remove the incentive to export LNG to overseas markets.

WisdomTree’s natural gas exchange traded fund (NGAS ETF) is up 43% over a 12 month period, and 81% on a YTD basis. It is up over 50% on a three month basis. Its x3 leverage bull ETF (3NGL) is up a staggering 213% in the last three months.

Explore Natural Gas ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Natural Gas
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
WisdomTree Natural Gas – EUR Daily Hedged
WisdomTree Natural Gas  1x Daily Short
AJ Bell Youinvest | Charles Stanley Direct | EQi
WisdomTree Natural Gas 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
WisdomTree Natural Gas 3x Daily Leveraged
Hargreaves LansdownAJ Bell Youinvest | EQi
WisdomTree Natural Gas 3x Daily Short
Hargreaves Lansdown | AJ Bell Youinvest | EQi

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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