The Wild Ride For Natural Gas Isn’t Over Yet

Last year was, to say the least, a bit of a wild ride in natural gas. Don’t get me wrong…I’m not complaining. I was always taught that volatility is a trader’s friend if for no other reason than that you can’t make money on something that doesn’t move. Still, a commodity that more than doubled in a four-month period before topping out and giving almost all those gains back in the next two months is a bit more volatile than a lot of people can handle. So far, this year has started off in the same vein, with a 15% jump on Wednesday given back the very next day.

So, what kind of year can we expect for natty? More of the same, or will things calm down? Will we retreat to the $2.50-$3 range that persisted for the first half of last year, or are we into a new era where the range will be roughly double that?

Of course, if those questions were easy to answer, we would all be fabulously wealthy by now and I wouldn’t be wasting time trying to answer them. Just as with crude however, which I talked about last week, what we can do is look at what might be the major influences that will decide where natty goes in 2022 and from there arrive at the most likely scenario.

The biggest of those is the situation on the Ukrainian border. The year started with an attempt at a diplomatic solution to the buildup of Russian troops there, an attempt that failed miserably. As long as the Russians refuse to back down, the risk of disruption to the supply of natural gas, whether intentional or the result of things coming to a head, will mitigate against a significant move lower, and make big jumps possible on any bad news.

The supply side here in the U.S. also points to higher prices. Energy companies have not yet reinstated the capex cuts that followed the start of the pandemic, keeping supply relatively tight. The spread of the omicron variant of COVID-19 has depressed demand somewhat so natty has dropped back from its highs but, assuming that we are near the end of this phase of the pandemic, that will only be a temporary influence.

On the other side of the coin, though, the view that natty is a relatively “clean” alternative to coal and oil that has prevailed over the last decade or so is being replaced by a more radical environmental opinion that all fossil fuels are bad, and that investment should be concentrated in the renewable energy fields. That isn’t just political either; several big oil companies are taking the same view, which raises the question of whether investment in oil and gas will ever recover.

On balance, at least for the early part of the year, the bull case for natty looks more powerful, and recent market moves confirm that view.

The fact that the “launch level” of the run up from early July at around $3.50 held at year’s end suggests that we are towards the bottom of a new, higher range. If that is the case, then even as the shorter-term bullish influences fade as the year progresses, the balance of risk is still to the upside.

If natty itself, through forwards or leveraged ETFs, is a bit too wild for you, there are other, less volatile ways of playing that. Long-term positions in natty stocks such as Chesapeake (CHK) and Cheniere (LNG) may pay off this year, even though both showed significant gains last year and haven’t really pulled back on the latest drop in NG. Because they are still elevated relative to natural gas prices, though, waiting for a pullback to key levels, around $60 for CHK and $100 for LNG before buying is the best strategy.

All in all, then, 2022 could well be another good year for natty. If nothing else, continued volatility will make it interesting!