Natural gas: What to expect in 2024

Over the past year, natural gas futures (NG) have become one of the most popular instruments on the Moscow Exchange. High liquidity and significant volatility make it extremely attractive for trading. Let's find out what traders should expect from the commodity next year.

 

Since the beginning of the year, Henry Hub natural gas (NG) futures prices have lost about 56%. Thesupply/demand balance this year has shifted significantly in favor of the latter. A relatively warm winter in the U.S. and Europe, lower consumption due to slowing economic activity, high inventory levels from last year, renewable energy generation in Europe, and record levels of gas production in the U.S. have pressured NG prices.Thanks to these factors, the market will once again welcome the new year with full storage facilities. Focusing on data from the EIA, inventories in America are 316 bcf above the 5-year average, which is historically quite a strong deviation. In Europe, inventory levels in the major consuming countries are holding around 90%. There is also an oversupply in the Asian LNG market.

 

Traders should not expect significant growth until the end of winter. Historically, between mid-December and late February, the price of natural gas futures tends to decline due to falling demand. Price spikes can occur due to revised weather forecasts and localized increases in consumption. However, temperatures are now expected to stay above the 5-year average. Additional demand from consumers, if any, will be moderate. It may remain at 40 bcf/d through the winter, which is 2% below the 5-year average. Cumulative power generation over the last 52 weeks in the US continues to hold at -0.7% y/y, weighing on commodity prices.

 

The main factor in keeping temperatures above average is the influence of the Il Niño. The ONI index from the National Oceanic and Atmospheric Administration records above 0.5p. - This usually signals the prevalence of the Southern Oscillation. Such periods correlate with rising inventories at Henry Hub and falling gas prices. However, it is worth noting that the ONI index has risen to historically extreme levels, so a regime change is possible, but it is difficult to predict this point in advance.

 

Natural gas could show totals above current expectations if summers in the US and the Old World are hot, which is a fairly likely scenario given the current influence of Il Niño. Difficult factors to predict are RES generation levels in Europe and geopolitical events - traders will have to react as they occur. Building a quantitative model of natural gas valuation shows that the commodity does not look expensive at current levels. The upside for growth in the next pre-winter season is present. Additional price declines are possible, in which case natural gas will become attractive not only for speculation but also for medium-term purchases.