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Natural Gas: Is the Window Closing for the Bears With the Chill Outside?
Natural Gas: Is the Window Closing for the Bears With the Chill Outside?
By Barani Krishnan/   |  Jan 26, 2023 10:28
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  • With $3 support taken out and gas at the $2 territory, some are suggesting a drop to $1 levels
  • Weather forecasts signal a February freeze that could flip the market’s direction
  • Technicals suggest a further drop to $2.60-$2.50 before a rebound toward $3.30

The much-touted $3 support for natural gas is history, but is it game over for the bears?

To the surprise of even some of those shorting the market, forums dedicated to US gas futures are discussing the possibility of the market going below $2 next.

Natural gas, of course, has traded in $1 territory before, with the front-month contract on the New York Mercantile Exchange’s Henry Hub moving in a range of $1.808-$1.987 per mmBtu, or million metric British thermal units, in September 2020.

That was in the COVID era when there was negligible commercial demand for gas — i.e., cooling and heating in buildings — as almost everyone still worked out of home then. While on-site work hasn’t really returned to pre-pandemic levels yet (and it might never), gas still soared from that sub-$2 level to a 14-year high of $10 per mmBtu by August 2022.

The jump of five times was due partly to COVID-fueled inflation, as well as panic that the United States and especially Europe — which had over the years become more reliant on US liquefied natural gas, or LNG — would run out of fuel amid the Ukraine war and Russia’s move to weaponize supply.

But in less than two months, the bullish foundations in gas have completely come apart, hurtling prices down at the pace of a comet headed toward earth. From a high of $7 in December, the Henry Hub’s front-month hit a near 21-month low of $2.790 in Wednesday’s post-settlement trade, down 62%.

Natural Gas Daily Chart
Natural Gas Daily Chart

The meltdown in gas prices began with US output of dry natural gas averaging record highs of more than 100 bcf/d, or billion cubic feet per day, in October and November, giving market bears the conviction that there might be more in US gas storage than necessary to ride out the 2022/23 winter.

Europe had also stocked up so much gas within such a short time after the outbreak of the fighting in Ukraine that Germany, right through to Poland, looked ready to stay warm through March.

The final straw was the weather itself, which since the official start of winter on Dec. 21, has felt more like an extended fall season, albeit like summer days at times.

But it’s going to get colder, we hear. And the growing buzz about a freezing February has become a cacophony in recent days, as the US-based Global Forecast System and the European ECMWF weather model signal greater Arctic winds in much of the United States, including gas production areas in Texas, Louisiana, and the Appalachian region.

Unlike the late December 2022 Arctic blast that plunged deep into Texas and Louisiana and featured very little, if any, ice or snow, the looming February winter event is threatening to usher in icy precipitation along with frigid temperatures.

That could potentially extend freeze-offs in oil and gas wells, depending on how much ice arrives, said Gelber & Associates, a Houston-based gas markets trading consultancy. Gelber’s analysts said:

“If and when the February Arctic blast comes to fruition, it’s not out of the question that NYMEX March 2023 gas futures prices could test the $3.75/mmBtu $4.00/mmBtu area soon.”

As though on cue, Texas-based LNG export terminal Freeport is reported to be readying to resume operations in February. Freeport consumed 2 bcf/d of gas until its sudden closure in June left the market with some 420 bcf, or billion cubic feet, of idle supply. Traders are estimating that it could take till late next month for LNG shipments to again leave the terminal.

“If Freeport actually does manage to come online in February, thus tightening the supply/demand imbalances, then it could set the stage for a move back above $4.00/mmBtu within the next few weeks,” Gelber’s analysts said. But until then, they said, “sellers may continue to pressure prices.”

And that exactly is where things stand, said John Kilduff, founding partner at New York-based energy hedge fund Again Capital.

“I agree that what’s going on in gas now is a hedge fund game more than a weather game. This is really a game for the deep-pocketed.”

He adds:

“The funds that were buying gas with little rationale between July and August are selling and selling now, seemingly unbothered that real winter weather is already knocking on our doors, based on forecasts. But I wouldn’t say that the selloff of the past two months is entirely without merit. The Freeport reopening has been delayed and delayed for months. Also, we got to crazy highs with that $10 pricing in August, even when there was an inkling then that storage might not really be headed for a squeeze.”

Still, for gas to snap below $2 support, as per the discussion on’s trading forum, the front-month on the Henry Hub would have to lose about 80 cents. A couple of weeks ago, it could drop 40 to 50 cents in a session — meaning the downside target might be achieved in just a couple of days. But with Arctic winds poised to unleash their might on many US states, one wonders how well the nerves of bearish funds will matter against technicals and fundamentals.

Said Sunil Kumar Dixit, chief technical strategist at

“I see that a further drop to between $2.60 and $2.50 is quite possible, but not beyond. Seven weeks of relentless selling has put gas under extremely oversold conditions, and now this calls for a strong rebound from support areas.

But the rebound needs to clear through several levels that have formed a cluster of resistance, starting from $3.05 to $3.11 and $3.15, and mainly settling at $3.30.”

Traders are also bracing for what the US Energy Information Administration could report as the latest weekly draw by utilities from the national gas storage for heating purposes.

A Reuters poll on Wednesday showed utilities likely pulled 82 bcf from storage during the week to Jan. 20 — identical to the pull seen during the previous week to Jan. 13.

But that draw was far less than the historical norm, as mild weather continued to reduce heating demand, the poll showed. A case in point was the withdrawal of 217 bcf during the same week a year ago and a five-year (2018-2022) average decline of 185 bcf.

The forecast for the week ended Jan. 20 would cut stockpiles to 2.738 trillion cubic feet (tcf), about 4.4% above the same week a year ago and 5.3% above the five-year average.

There were around 154 heating degree days (HDDs) last week, which is fewer than the 30-year normal of 196 HDDs for the period, according to Reuters-associated data provider Refinitiv.

In the off chance that there’s no sustained cold in the weeks ahead, then all bets for a rally are off the table, analysts at The Schork Report said in comments carried by trade journal “Gas bulls are running out of winter,” they said.

EBW Analytics Group’s senior analyst Eli Rubin concurred that the bears have a clear advantage at this stage in the season:

“The combination of high production, Freeport offline, swelling surpluses, and lack of winter supply adequacy risks points to extended downside risks over the next 30-45 days.”

For gas longs frustrated by the tenacity of the bears, I would suggest the wisdom of John Maynard Keynes, who famously said: “Markets can stay irrational longer than you can stay solvent.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Natural Gas: Is the Window Closing for the Bears With the Chill Outside?

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Natural Gas: Is the Window Closing for the Bears With the Chill Outside?

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