US gas price growth is unsustainable

This week, natural gas prices in the US rose above the 3.6 mark for the first time since January. The rise in prices was very sharp and most likely was caused by traders closing short positions on a massive scale. In most cases such impulses are followed by a pullback, just as it is happening now. A full recovery of gas prices to the initial positions of the beginning of the week, into the range of 3.32-3.4, cannot be ruled out.

Sharp fluctuations in natural gas prices are caused by constantly changing weather forecasts and overestimation of demand for heating. At the same time, gas market fundamentals are limiting price growth. The number of active drilling rigs in October interrupted the downtrend and remained at the September average level of 118 units. That is, American companies consider the current price level sufficient for further increase in natural gas production.

Exports could compensate for the gas surplus on the US domestic market. In October, foreign LNG deliveries reached the level of 7.92 million tons, second only to April's historic high of 8.01 million tons. However, Rystad Energy reports that Europe's underground storage facilities are now almost 100% full, while LNG buyers in Asia have been inactive due to fuel prices rising 70% over the past 3 months.

An additional problem is obtaining LNG export permits. The average processing time for applications has increased from 7 weeks to 11 months in recent years. Many industrialists, particularly the steel, chemical, food and agriculture industries, are against the growth of US gas exports. They are concerned about potential fuel price increases. Restricting overseas shipments will increase the supply of gas on the US domestic market and put pressure on prices.

Now the main scenario for gas prices is the continuation of correction to the levels of 3.4 and 3.32. A more dramatic drop in price is also possible, but it requires additional drivers, such as the forecast of significant warming in the US.

Consider the following trading strategy:

Sell natural gas above the level of 3.4. Take profit - 3.32. Stop loss - 3.54.

Traders may also use a Trailing stop instead of a fixed Stop loss at their discretion