Are Natural Gas Prices in a ‘Buy’ Zone Right Now?

Last week, natural gas active futures rose 6.8% and settled at $1.849 per MMBtu—the largest weekly gain since the week ended April 10.

The US summer season started at the beginning of June. Usually, the demand for natural gas rises for cooling purposes. Natural gas prices could see a large upside in the coming months. Will natural gas prices rise this summer or remain range-bound?

Inventories spread

During this period last year, the natural gas inventories spread was at -16.4%. For the week ended May 22, the natural gas inventories spread was at 19.3%. Notably, the inventories spread is the difference between natural gas inventories and their five-year average.

The inventories spread is important for natural gas prices. Usually, gas prices and the inventories spread share an inverse relationship. The United States Natural Gas (NYSEARCA:UNG) invests in gas futures. UNG is also sensitive to the inventories spread.

A good buy?

According to the EIA’s DPR (Drilling Productivity Report), US natural gas supplies from the major seven shale regions will likely fall by 0.9% on a month-over-month basis in June. Last year, natural gas supplies rose by approximately 1% in June.

A possible fall in natural gas supplies could flatten or reverse the rise in the inventories spread. Based on the EIA’s STEO report, in 2020, the natural gas spot price will likely average $2.14 per MMBtu and then rise to $2.89 per MMBtu in the next year.

The EIA report also mentioned that natural gas prices could rise in the remainder of 2020 due to lower production. Travel restrictions amid the COVID-19 outbreak could also increase the natural gas usage for domestic consumption this year.

Price forecast and technical

On Tuesday, natural gas’s implied volatility was 65.6%. Based on the implied volatility, active futures will likely close between $1.62 and $1.92 per MMBtu until June 9.

On Tuesday, the active natural gas futures settled 1.9% below their 20-day moving average. The 20-day moving average at $1.81 per MMBtu is an important resistance zone for gas prices. Natural gas futures settled 2.8% and 16% below their 100- and 200-day moving averages, respectively.

If the EIA reports a sharp decline in the natural gas inventories spread, natural gas prices could test the 20-day and 100-day moving averages. For more updates on the energy sector, visit our Energy and Utility page.