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In the first three trading sessions this week NYMEX natural gas futures managed to rise to a 14-year high and then drop more than 8% and 6% consecutively as the market reached seriously overbought territory. The May 2022 natural gas contract hit the peak of $7.82 per million British thermal units on Monday only to drop to $6.80/MMBtu by Wednesday.

The short-term impetus for the rally was a slight aberration in the US weather pattern. The commodity is mainly used in power generation and for heating homes and businesses and a spot of colder weather in April, when the gas is normally already being put in storage in preparation for next winter, caught some traders by surprise. According to the US national statistics agency EIA working natural gas stocks in the week ending 15 April were 23% lower than a year ago and 17% lower than the five-year average for this week.

But with the May natural gas futures contract nearing expiry and the weather turning warmer this week natural gas futures went through a mini crash. Concerns about the rising inflation in the US and warning bells from the Federal Reserve Thursday didn’t help. When chairman Jay Powell signalled that the central bank plans to raise interest rates by half a percentage point at its next meeting in May, not only commodities but also US equities went into a tailspin.

Bigger picture for natural gas futures

While the last phase of the price action was dominated by short term weather and the imminent contract expiry, the underlying global squeeze in energy supplies remains in place and will rear its head again later in the year. The conflict in Ukraine has severely disrupted the inflows of gas into Europe and Europe has turned to the US for imports of LNG. Unless there is a swift resolution of the conflict in Ukraine, which seems fairly unlikely,

Europe will go into next winter with insufficient gas supplies.

Trade NGSP here
Atlantic . IG
At the same time overall demand in the US is on the rise and although the retail sector may end up consuming less gas because of higher gas prices, higher inflation and rising interest rates, strong demand from the industrial sector and power generation will go some way to balance it out. EIA April data shows that US gas production in April has risen 3.8% on the year but demand has risen slightly faster, by 4.4%.

Natural gas prices follow a seasonal flow and tend to decline at least in May and June, and in some years also in July and August. But prices typically turn higher at the end of summer in anticipation of colder weather. In this respect the drop in prices could present a convenient entry point into this market.

The worldwide squeeze that pushed prices higher last winter will still be in place in the autumn – a move that is also anticipated by UK gas regulators. The UK regulator has allowed the price cap on gas to increase at the beginning of April by 54% and is expected to raise the price cap again at its next six-month review point in October. Both industrial users and speculative players could end up buying more gas this summer in anticipation of further price rises in the winter.

WisdomTree Natural Gas ETFs

Product NameISINExchange TickerListing Currency
WisdomTree Natural Gas
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KY104NGASUSD
WisdomTree Natural Gas – EUR Daily Hedged
EQi
JE00B6XF0923ENGSEUR
WisdomTree Natural Gas  1x Daily Short
AJ Bell Youinvest | Charles Stanley Direct | EQi
JE00B24DKH53SNGAUSD
WisdomTree Natural Gas 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
JE00BDD9Q956LNGAUSD
WisdomTree Natural Gas 3x Daily Leveraged
Hargreaves Lansdown | AJ Bell Youinvest | EQi
IE00BLRPRG983NGLUSD
WisdomTree Natural Gas 3x Daily Short
Hargreaves Lansdown | AJ Bell Youinvest | EQi
IE00B76BRD763NGSUSD

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Vanya Dragomanovic

Vanya Dragomanovich

Vanya is an award-winning financial journalist who has worked in both television and newswires. She spent over 10 years at Dow Jones covering commodity markets, including metals, coffee, cocoa and oil. She also reported from the floor of the London Metals Exchange, and appeared on CNBC to discuss international metals markets. Since then she has written for several leading financial publications, including serving as commodities editor for FTSE Global Markets.

Vanya continues to cover international commodities markets globally, specialising in particular on metals and alternative energy. She is also the author of a book on CFD trading.

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