Natural Gas – The Most Bullish Commodity?

Despite the $0.68 setback from last week’s high, an injection to storage at the upper end of expectations last week, a slight narrowing of the EIA storage deficit to the 5-year average, and rising demand concerns, we think natural gas could be the strongest commodity market in the coming months. A slowing global economy will reduce demand, and more US supply is on its way, but a global rush to meet current demand requirements and fill strategic stockpiles (to avoid severe shortages and sky-high prices) should overwhelmingly favor the bull camp. The biggest limitations to expanding export demand for US natural gas are structural.

EIA working gas in storage

To alter the bull trend, it would probably require a massive downturn in the global economy or a cease fire in the Ukraine-Russia war (which we think is very unlikely). Given Russia’s indefensible attack and occupation of Ukraine, a halt to the gradually expanding embargo of Russian gas imports is unlikely. Therefore, consuming nations will be incentivized to build their strategic stockpiles. This will pull future demand into the present and result in a serious gap in demand in the future.

While the shift away from Russian gas has been in play since the invasion started, we think the reduction in purchases from Russia is just now starting to have a material impact on world supply. Last week Russia announced it was closing supply to Finland. Key pipeline supply flow under Ukraine is on one day and off the next. Every shunned billion cubic feet of Russian gas translates into increased demand for US and Middle East supply.

Natural gas july 2018

US structural export capacity constraints will limit growth in US exports, but that export strength has already limited the pace of seasonal rebuilding of supply in the US. Stockpiles are currently running 15% below the 5-year average for this time of year. July 2018 Natural Gas rose sharply from a May low at a time when the year over year deficit in EIA gas inventories was the widest in four years. And given the consistent growth in global gas and LNG consumption, the ability to rebuild US domestic supply will be limited.

With the most recent COT report showing a spec and fund net short of 63,406 contracts, the loss of Russian supply, a seasonal ramp up in cooling demand, and historic efforts to build global strategic stockpiles, we expect natural gas prices to march higher on heavy volatility.

EIA Working gas in storage

Originally Published on May 20, 2022

Disclosure: The Hightower Report

This report includes information from sources believed to be reliable, but no independent verification has been made, and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the expressed written consent of The Hightower Report is strictly prohibited. The data contained herein is subject to revision; independent verification is recommended. Any third party opinions regarding this report are not necessarily those of the authors. Due to the volatile nature of futures and options markets, the information contained herein may be outdated upon its release.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from The Hightower Report and is being posted with permission from The Hightower Report. The views expressed in this material are solely those of the author and/or The Hightower Report and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.