Natural Gas extends rally on storage data, European plant outages, hotter weather

Natural Gas extends higher on Friday, though at a slower pace as the US Dollar finds a floor on the back of hawkish Fedspeak.
The latest driver is the news that the Groningen Gas plant in the Netherlands will probably close in October 2023, a year earlier than previously thought.
A weaker US Dollar following the ECB’s hawkish hike on Thursday adds further fuel to XNG/USD’s rally.

Natural Gas price has shot up over 14% so far this week, propelled by lower-than-expected storage data, hotter weather conditions (Gas is used for cooling as well as heating), reports of high-profile outages in Europe, a substantially weaker US Dollar, and expectations of keener demand from Asia.

XNG/USD is trading higher on Friday, extending a strong start and exchanging hands at $2.707 MMBtu, at the time of writing.

Natural Gas news and market movers

Natural Gas gains support from rumors reported by Bloomberg that the Groningen Gas plant in the Netherlands could close a year earlier than expected – this October rather than next – due to mounting complaints because of political pressure from earthquakes caused by the plant damaging local residents’ homes.
Weekly data from the US Energy Information Administration (EIA) showed an unexpected fall in Natural Gas Storage Change data to 84B cubic feet in the previous week when 95B had been forecast, suggesting demand outweighs supply.
According to a report by Reuters, the Nyhamna Gas processing plant in Norway is experiencing technical problems that will put an end to production for a month. This is much longer than expected and rattles confidence in Norwegian supply.
Commitment of Traders (COT) data tracking Gas futures positions from last week showed many traders were short Natural Gas futures. Many of these traders were caught in a ‘short squeeze’ this week, which led to panic covering, further adding fuel to the rally.
XNG/USD experienced further upside from a substantial weakening of the US Dollar after the European Central Bank (ECB) executed a hawkish rate hike at its meeting on Thursday, strengthening the Euro and weighing on the US Dollar Index (DXY).
The kicker came from the ECB revising up its forecasts for core inflation in 2023-4.
ECB President Christine Lagarde made it clear the ECB would keep the door open to further rate hikes in the future during her press conference after the meeting.
That said, hawkish commentary from Federal Reserve's Christopher Waller on Friday helps support the US Dollar, as does a higher-than-expected result for the University of Michigan Consumer Sentiment gauge.
Natural Gas price is further underpinned by expectations of higher Asian demand and Russian pipeline disruptions.
A hotter-than-expected summer drives increased demand for Natural Gas used in cooling, bolstering prices.

Natural Gas Technical Analysis: Recovering within a longer-term downtrend

Natural Gas price remains in a long-term downtrend ever since turning lower from its peak of $9.960 MMBtu achieved in August 2022. That said, bearish momentum has tapered off considerably since February 2023, as evidenced by the bullish convergence of the Relative Strength Index (RSI) momentum indicator with price, beginning in May. Bullish convergence occurs when price makes new lows but RSI fails to copy. It can be indicative of a bullish reversal brewing.

Nevertheless, unless Natural Gas can break above the last lower high of the long-term downtrend at $3.079 MMBtu, the odds still favor an extension of the bear trend, and shorts over longs.

A break below the $2.110 MMBtu year-to-date lows would solidify the bearish outlook and suggest a continuation down to a target at $1.546 MMBtu, the 61.8% Fibonacci extension of the height of the roughly sideways consolidation range that has unfolded during 2023.

Natural Gas: Weekly Chart

Scoping into the daily chart, it can be seen that price has now broken above both the 50 and not the 100-day Simple Moving Average (SMA), which is a short-term bullish sign.

Natural Gas: Daily Chart

Looking at the 4-hour chart, the pair has been in a short-term uptrend since the start of June 2023, making successively higher highs and higher lows.

Natural Gas: 4-hour Chart

This falls in line with the bullish RSI convergence observed on the weekly chart.

Yet on the 4-hour chart, RSI is now blinking ‘overbought’ (above 70), which is a signal for bulls not to add any new long positions. In the event of RSI exiting the overbought zone and returning to neutral territory, it would be a signal for short-term horizon bulls to close their long positions altogether, and is likely to be indicative of a pullback in price after the recent strong gains.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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