A potential decline in natural gas production stimulates a price reversal

02 June 2023 219
A potential decline in natural gas production stimulates a price reversal

The price of natural gas in the U.S. has reached the correction target from our previous forecast. Several fundamental factors are weighing on the gas price.

 

Global demand for liquefied natural gas (LNG) is declining. Prices have also been impacted by larger than expected LNG inventories in Europe and energy transition.

As of May 29, EU natural gas storage was 68.37% full. This is the highest level of LNG reserves for this time of year in at least a decade.

Analysts said weak economic data from China affected the outlook for natural gas demand in Asia as well as its global prices. In May, China's manufacturing PMI fell to a five-month low of 48.8.

 

Despite that, natural gas has reached a price that justifies the current fundamentals, and now there might be an attempt to rebound. To form a reversal, traders can latch on to any positive news regarding increased demand or reduced production.

Currently forming trends could lead to a drop in gas production in the near future. Low prices make many projects unprofitable. Also, the renewable energy transition is putting pressure on oil and gas investments. Recent news reports give such signals.

 

According to Ed Morse, head of commodities at Citigroup, currently there is a risk of reduced investment in oil and gas projects by individuals and financial institutions. 

Everything will depend on the pace of adoption of new technologies and the amount of spending on alternative fuels, the analyst said.

According to Matthew Fitzsimmons, senior vice president of Rystad Energy, orders for U.S. oil and gas production equipment have not exceeded $2 billion in a single month since 2016.

As Fitzsimmons notes, the volume of orders peaked between 2010 and 2014, and their monthly level was maintained at about $3 billion. But in the first quarter of this year, new orders were nearly one third below the average for the mentioned record-breaking period.

 

According to technical analysis, natural gas prices have reached an important support level. Apparently, prices will attempt to reverse from this point. The Fibonacci level 0.236 of the whole fall wave will be the first growth target, which is the price of $2.29. A stop-loss could be set at updating the local minimum of about $2.12.

 

A decline in the natural gas price:

Take profit – 2.29

Stop-loss – 2.12

This content is for informational purposes only and is not intended to be investing advice.

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