Natural Gas: Has it Found a Bottom?
Natural gas made a stunning rally to an all-time high, only to come crashing back down again. It's been a while since we last covered natural gas, so let's take a look at what's happened since then.
The previous technical & seasonality setup played out perfectly with the RSI bouncing off the low and the rally into the winter season, hitting our profit target and extending further.
This time, we're seeing a similar setup on a different timescale. Zooming out, natural gas has retraced the entire move it made in the past three years and is now back to pre-COVID levels. The question is, has natural gas found a bottom here?
Looking at the weekly chart for natural gas over the past 20 years, we see an interesting picture. The weekly RSI has only broken past the 30 level five times over this two-decade period, and each time marked the rough bottom for natural gas. Fortunately, we're seeing this exact setup now, with prices seeming to find resistance at the $2 handle, which has also proven to be a reliable resistance level.
Comparing the Henry Hub natural gas against the Dutch TTF natural gas, we can see the spread back to the lows when adjusting for the same unit measurement of MMBtu and in USD.
On the fundamental side, this excerpt from the US Energy Information Administration (EIA) sums up the outlook for Natural Gas vs Coal:
“Natural gas-fired generation capacity in the United States has grown in recent years, although coal-fired generation has continued to decline. Lower coal-fired generation is due to a long-term trend of coal power plant retirements and increased competition with natural gas-fired combined-cycle plants when natural gas prices are low. A total of 11.5 gigawatts (GW) of U.S. coal-fired electricity generating capacity retired in 2022. No new coal-fired capacity has come online since 2013, and developers have not reported any plans to build new U.S. coal-fired capacity in the future. In contrast, nearly 6.1 GW of natural gas-fired capacity was added in 2022, according to our Preliminary Monthly Electric Generator Inventory.”
Natural Gas saw a record high for the winter heating season.
Additionally, close to 23% of US coal plants have plans to retire by 2029, and the last new coal plant that came online in the US was in 2013, 10 years ago.
With coal plants being the second-largest source of electricity in the US and supply being cut, energy has to come from somewhere else. While the push for renewable energy continues, natural gas remains the main source of energy production. The dissipation of supply from retiring coal plants will likely be filled by natural gas. The reason being? Natural Gas currently remains most reliable form of energy source, while nuclear faces political pushbacks and Wind, Hydro & Solar have unpredictable/intermittent generation capacity.
Lastly, the Dollar sits on a key level now. If broken, the weakening dollar could drive commodities prices higher en masse.
All in all, the case to long natural gas from here seems reasonable, with the fundamental outlook for Natural gas still positive and the technical set-up pointing to a low. Taking a long position at the current levels of 2.186 and setting our stops at 1.85 and our first take profit level at 3.1 gives us a reasonable halfway point while setting our next take profit level at 3.8 gives us a higher profit potential if prices continue to rise. CME’s Henry Hub Natural gas is quoted in U.S. dollars and cents per MMBtu. Each 0.001 increment equal to 10$.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
cmegroup.com/markets/energy/natural-gas/natural-gas.html
eia.gov/naturalgas/weekly/
eia.gov/todayinenergy/detail.php?id=54559
blogs.worldbank.org/opendata/bubble-trouble-whats-behind-highs-and-lows-natural-gas-markets
The previous technical & seasonality setup played out perfectly with the RSI bouncing off the low and the rally into the winter season, hitting our profit target and extending further.
This time, we're seeing a similar setup on a different timescale. Zooming out, natural gas has retraced the entire move it made in the past three years and is now back to pre-COVID levels. The question is, has natural gas found a bottom here?
Looking at the weekly chart for natural gas over the past 20 years, we see an interesting picture. The weekly RSI has only broken past the 30 level five times over this two-decade period, and each time marked the rough bottom for natural gas. Fortunately, we're seeing this exact setup now, with prices seeming to find resistance at the $2 handle, which has also proven to be a reliable resistance level.
Comparing the Henry Hub natural gas against the Dutch TTF natural gas, we can see the spread back to the lows when adjusting for the same unit measurement of MMBtu and in USD.
On the fundamental side, this excerpt from the US Energy Information Administration (EIA) sums up the outlook for Natural Gas vs Coal:
“Natural gas-fired generation capacity in the United States has grown in recent years, although coal-fired generation has continued to decline. Lower coal-fired generation is due to a long-term trend of coal power plant retirements and increased competition with natural gas-fired combined-cycle plants when natural gas prices are low. A total of 11.5 gigawatts (GW) of U.S. coal-fired electricity generating capacity retired in 2022. No new coal-fired capacity has come online since 2013, and developers have not reported any plans to build new U.S. coal-fired capacity in the future. In contrast, nearly 6.1 GW of natural gas-fired capacity was added in 2022, according to our Preliminary Monthly Electric Generator Inventory.”
Natural Gas saw a record high for the winter heating season.
Additionally, close to 23% of US coal plants have plans to retire by 2029, and the last new coal plant that came online in the US was in 2013, 10 years ago.
With coal plants being the second-largest source of electricity in the US and supply being cut, energy has to come from somewhere else. While the push for renewable energy continues, natural gas remains the main source of energy production. The dissipation of supply from retiring coal plants will likely be filled by natural gas. The reason being? Natural Gas currently remains most reliable form of energy source, while nuclear faces political pushbacks and Wind, Hydro & Solar have unpredictable/intermittent generation capacity.
Lastly, the Dollar sits on a key level now. If broken, the weakening dollar could drive commodities prices higher en masse.
All in all, the case to long natural gas from here seems reasonable, with the fundamental outlook for Natural gas still positive and the technical set-up pointing to a low. Taking a long position at the current levels of 2.186 and setting our stops at 1.85 and our first take profit level at 3.1 gives us a reasonable halfway point while setting our next take profit level at 3.8 gives us a higher profit potential if prices continue to rise. CME’s Henry Hub Natural gas is quoted in U.S. dollars and cents per MMBtu. Each 0.001 increment equal to 10$.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
cmegroup.com/markets/energy/natural-gas/natural-gas.html
eia.gov/naturalgas/weekly/
eia.gov/todayinenergy/detail.php?id=54559
blogs.worldbank.org/opendata/bubble-trouble-whats-behind-highs-and-lows-natural-gas-markets
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