• Natural gas edged higher on Friday, albeit at a slower pace, as the US dollar found a bottom on the back of hawkish Fedspeak.
  • The latest driver is news that the Groningen Gas plant in the Netherlands is likely to close in October 2023, a year earlier than previously thought.
  • A weaker US dollar after Thursday’s hawkish ECB hike adds more fuel to the XNG/USD rally.

Natural gas prices soar more than 14% this week, helped by lower-than-expected inventories datawarmer weather conditions (gas is used for both cooling and heating), reports of significant outages in Europe, significantly weaker American dollarand expectations of stronger 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 Drivers

  • Natural gas is getting a boost from rumors reported by Bloomberg that the Groningen Gas plant in the Netherlands could be shut down a year earlier than expected – this October rather than next – due to mounting complaints over political pressure from earthquakes caused by the plant damaging local residents’ homes. .
  • Weekly data from the U.S. Energy Information Administration (EIA) showed an unexpected drop in natural gas storage change data to 84 billion cubic feet in the previous week, from a forecast of 95 billion, suggesting that demand is outweighing supply.
  • Norway’s Nyhamna Gas processing plant is experiencing technical problems that will shut down production for a month, according to a Reuters report. This is much longer than expected and shakes confidence in Norwegian supplies.
  • Tracking gas futures commitment of traders (COT) data from last week showed that many traders were short natural gas futures. Many of these traders were caught in a “short squeeze” this week, leading to panic coverage, adding even more fuel to the rally.
  • XNG/USD saw further gains on the back of a significant weakening of the US dollar after the European Central Bank (ECB) made a hawkish rate hike on its Meeting on Thursday, the strengthening of the euro and the weighting of the US dollar index (DXY).
  • This was because the ECB revised its forecasts for core inflation in 2023-4.
  • ECB President Christine Lagarde made it clear at her post-meeting press conference that the ECB will keep the door open to further rate hikes in the future.
  • That said, a hawkish comment from the Federal Reserve’s Christopher Waller on Friday is helping support the US dollar, as is a higher-than-expected result for the University of Michigan consumer sentiment gauge.
  • The price of natural gas is further supported by expectations of higher Asian demand and the interruption of Russian oil pipelines.
  • A warmer-than-expected summer is increasing demand for natural gas used for cooling and driving up prices.

Natural Gas Technical Analysis: Renewal in Longer Downtrend

The price of natural gas remains in a long-term downtrend since falling from its high of 9.960 MMBtu reached in August 2022. The bearish momentum has diminished considerably since February 2023, as evidenced by the bullish convergence of the Relative Strength Index (RSI), a momentum indicator with the price, starting in May. A bullish convergence occurs when the price makes new lows but the RSI fails to copy. It may indicate a bullish reversal.

However, if natural gas fails to break the last lower high of the long-term downtrend at 3.079 MMBtu, the odds still favor an extension of the bearish trend and shorts over longs.

A break below the year-to-date lows of $2.110 MMBtu would strengthen the bears view and propose a continuation down to the target of 1.546 MMBtu, or 61.8% Fibonacci extending the height of the roughly sideways consolidation range that developed during 2023.

Natural gas: weekly chart

Looking at the daily chart, it can be seen that the price has now broken above both the 50 and 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 beginning of June 2023, making successive higher highs and higher lows.

Natural Gas: 4 Hour Chart

This is consistent with the bullish RSI convergence seen on the weekly chart.

Still, the 4-hour RSI is now flashing “overbought” (above 70), a signal for bulls not to add any new long positions. In case the RSI leaves the overbought zone and returns to neutral territory, it would be a signal for short-term bulls to completely close out their long positions and is likely to indicate a decline in price after recent strong gains.

Frequently asked questions about the US dollar

What is the US dollar?

The United States dollar (USD) is the official currency of the United States of America and the “de facto” currency of a large number of other countries where it circulates alongside local banknotes. It is the most traded currency in the world, accounting for more than 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
After World War II, 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 ended.

What impact do Federal Reserve decisions have on the US dollar?

The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its primary tool to achieve these two goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, helping the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates, weighing on the dollar.

What is quantitative easing and how does it affect 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 troubled financial system.
This is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of counterparty default). It is a last resort when simply cutting interest rates is unlikely to achieve the desired result. It was the Fed’s weapon in fighting the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, mostly from financial institutions. QE usually leads to a weaker US dollar.

What is quantitative tightening and how does it affect the US dollar?

Quantitative tightening (QT) is the opposite process in which the Federal Reserve stops buying bonds from financial institutions and does not invest the principal of the bonds it holds in new purchases. It is usually positive for the US dollar.

Source Link