US Nat-Gas Poised to Rally on Rising Demand for Heating
Tightening supplies, fluctuating inventories, and volatile geopolitics present intriguing risk management and trading possibilities in US Liquified Natural Gas ("US LNG") markets.
Colder weather forecasts, robust LNG exports, and Europe's increasing dependence on US LNG continues to reshape global energy trade.
US LNG PRICES REBOUND IN NOVEMBER ON IMPROVING DEMAND OUTLOOK
Henry Hub Natural Gas prices are up 9.2% month-to-date supported by lower output, colder weather forecasts, higher European gas prices (Dutch TTF), and increased feed gas to US LNG facilities.
A supply disruption stemming from Hurricane Rafael halted 16% of US LNG production in the Gulf of Mexico. However, production quickly recovered with the hurricane dissipating.
Weather forecasts have fluctuated, creating demand uncertainty. While warmer-than-expected November forecasts briefly pulled prices back, they failed to reverse the overall uptrend.
European gas prices are spiking driven by colder weather forecasts, reduced wind power generation, & lower Norwegian gas supplies. Since the start of this month, TTF has climbed 15.5% reaching its highest level since November last year. The increase in Dutch TTF prices added upward pressure.
Colder European forecasts have redirected LNG shipments to the region. US LNG export activity also surged, with daily feed gas flows to export plants hitting a 10-month high on 15/Nov.
Exports to seven major LNG facilities averaged 13.3 billion cubic feet per day (bcfd) in November, up from 13.1 bcfd in October, reflecting strong international demand.
Meanwhile, natural gas production in the Lower 48 states fell to 100.3 bcfd in November from 101.3 bcfd in October, further tightening supply.
Source: EIA
Over the past four weeks, storage injections exceeded the five-year average, reversing a 14-week streak (12/Jul-11/Oct) of below-average builds.
While inventories may rise briefly, the first withdrawals of the winter season are approaching. Initial draws might be modest, but demand is expected to strengthen as winter progresses.
US LNG EXPORTS SURGE AS EUROPE SCRAMBLES TO REPLACE RUSSIAN IMPORTS
Since the start of the Russia-Ukraine conflict, the EU has sought alternative energy suppliers, relying heavily on the US, which accounted for 48% of EU LNG imports in H1 2024 (versus Russia's 16%). The US became the largest LNG exporter globally in 2023.
From 2018 through 2021, US LNG exports to Europe averaged around 15 million tons a year. In 2022 and 2023, they jumped to 55 million tons a year as European power generators scrambled to replace Russian gas by whatever means necessary.
Source: EIA
This trend is expected to continue as EIA expects US LNG export capacity to grow by 9.7 bcfd, to touch 24.4 bcfd by 2028.
In its latest short-term energy outlook, the EIA expects US LNG exports to grow by 1.7% YoY in 2024 and 14% YoY in 2025.
Source: EIA
So far in 2024, between Jan-Aug, US exports rose by 1.4% YoY.
A surge in natural gas exports to Europe, combined with the massive power demand from new AI data centers, could lead US LNG prices to rise. The EIA expects average Henry Hub prices to rise 33.6% to USD 2.9/MMBtu in 2025.
TRUMP’S RETURN TO PRESIDENCY PRESENTS A MIXED BAG FOR THE US LNG MARKET
Trump's re-election presents mixed implications for the US LNG market. While his policies could support the buildup of gas & LNG infrastructure, they might also curtail LNG exports to China.
Under President Biden, the US paused permits for new LNG projects (earlier this January) to assess environmental & economic impact. This raised concerns over a slowdown in US LNG exports. However, the Trump administration is expected to expedite LNG permits with fewer environmental restrictions.
Source: EIA
Trump’s policies could also revive protectionist measures, potentially intensify trade tensions with China. If Trump implements higher tariffs on Chinese goods, retaliatory tariffs on US LNG could follow, as seen during his first term in 2018-19. Since then, US LNG deliveries to China have plummeted since its high in 2021.
HYPOTHETICAL TRADE SETUP
CME Micro Henry Hub Natural Gas Futures are poised to rise amid growing heating demand into winter season and Europe's continued reliance on US LNG.
The options skew for Henry Hub Natural Gas Futures reached 30.69 on 18/Nov, up significantly from 6.66 on 03/Sep. This sharp rise signals growing bullish expectations, with calls becoming increasingly expensive relative to puts.
Source: CME Group
US Nat Gas January Futures Contract trades at USD 3.182/MMBtu which is 21.6% below the five-year average.
Amid the fundamental forces at play, this paper posits a hypothetical trade setup of long CME Micro Henry Hub Natural Gas January Futures Contract (expiring on 26/Dec) at USD 3.150/MMBtu with a stop at USD 2.840/MMBtu and target at USD 3.60/MMBtu resulting in a reward-to-risk ratio of 1.45x. Each Micro Henry Hub Nature Gas Futures contract has 1,000 MMBtu
Over the past five years, Henry Hub prices typically declined from mid-November to year-end. The rapid surge in US LNG exports to Europe, now nearly half of the continent’s imports, is expected to offset any moderation in US heating demand.
Standard Henry Hub Futures can be used in the same way as the Micro Henry Hub Futures to express a bullish outlook on the US LNG market.
Unlike the standard CME Henry Hub Natural Gas Futures contract, the micro contract requires a margin of USD 258/lot as of 19th November 2024.
• Entry: USD 3.150/MMBtu
• Target: USD 3.600/MMBtu
• Stop-Loss: USD 2.840/MMBtu
• Profit at Target: USD 450/lot
• Loss at Stop: USD 310/lot
• Reward-to-Risk Ratio: 1.45x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Colder weather forecasts, robust LNG exports, and Europe's increasing dependence on US LNG continues to reshape global energy trade.
US LNG PRICES REBOUND IN NOVEMBER ON IMPROVING DEMAND OUTLOOK
Henry Hub Natural Gas prices are up 9.2% month-to-date supported by lower output, colder weather forecasts, higher European gas prices (Dutch TTF), and increased feed gas to US LNG facilities.
A supply disruption stemming from Hurricane Rafael halted 16% of US LNG production in the Gulf of Mexico. However, production quickly recovered with the hurricane dissipating.
Weather forecasts have fluctuated, creating demand uncertainty. While warmer-than-expected November forecasts briefly pulled prices back, they failed to reverse the overall uptrend.
European gas prices are spiking driven by colder weather forecasts, reduced wind power generation, & lower Norwegian gas supplies. Since the start of this month, TTF has climbed 15.5% reaching its highest level since November last year. The increase in Dutch TTF prices added upward pressure.
Colder European forecasts have redirected LNG shipments to the region. US LNG export activity also surged, with daily feed gas flows to export plants hitting a 10-month high on 15/Nov.
Exports to seven major LNG facilities averaged 13.3 billion cubic feet per day (bcfd) in November, up from 13.1 bcfd in October, reflecting strong international demand.
Meanwhile, natural gas production in the Lower 48 states fell to 100.3 bcfd in November from 101.3 bcfd in October, further tightening supply.
Source: EIA
Over the past four weeks, storage injections exceeded the five-year average, reversing a 14-week streak (12/Jul-11/Oct) of below-average builds.
While inventories may rise briefly, the first withdrawals of the winter season are approaching. Initial draws might be modest, but demand is expected to strengthen as winter progresses.
US LNG EXPORTS SURGE AS EUROPE SCRAMBLES TO REPLACE RUSSIAN IMPORTS
Since the start of the Russia-Ukraine conflict, the EU has sought alternative energy suppliers, relying heavily on the US, which accounted for 48% of EU LNG imports in H1 2024 (versus Russia's 16%). The US became the largest LNG exporter globally in 2023.
From 2018 through 2021, US LNG exports to Europe averaged around 15 million tons a year. In 2022 and 2023, they jumped to 55 million tons a year as European power generators scrambled to replace Russian gas by whatever means necessary.
Source: EIA
This trend is expected to continue as EIA expects US LNG export capacity to grow by 9.7 bcfd, to touch 24.4 bcfd by 2028.
In its latest short-term energy outlook, the EIA expects US LNG exports to grow by 1.7% YoY in 2024 and 14% YoY in 2025.
Source: EIA
So far in 2024, between Jan-Aug, US exports rose by 1.4% YoY.
A surge in natural gas exports to Europe, combined with the massive power demand from new AI data centers, could lead US LNG prices to rise. The EIA expects average Henry Hub prices to rise 33.6% to USD 2.9/MMBtu in 2025.
TRUMP’S RETURN TO PRESIDENCY PRESENTS A MIXED BAG FOR THE US LNG MARKET
Trump's re-election presents mixed implications for the US LNG market. While his policies could support the buildup of gas & LNG infrastructure, they might also curtail LNG exports to China.
Under President Biden, the US paused permits for new LNG projects (earlier this January) to assess environmental & economic impact. This raised concerns over a slowdown in US LNG exports. However, the Trump administration is expected to expedite LNG permits with fewer environmental restrictions.
Source: EIA
Trump’s policies could also revive protectionist measures, potentially intensify trade tensions with China. If Trump implements higher tariffs on Chinese goods, retaliatory tariffs on US LNG could follow, as seen during his first term in 2018-19. Since then, US LNG deliveries to China have plummeted since its high in 2021.
HYPOTHETICAL TRADE SETUP
CME Micro Henry Hub Natural Gas Futures are poised to rise amid growing heating demand into winter season and Europe's continued reliance on US LNG.
The options skew for Henry Hub Natural Gas Futures reached 30.69 on 18/Nov, up significantly from 6.66 on 03/Sep. This sharp rise signals growing bullish expectations, with calls becoming increasingly expensive relative to puts.
Source: CME Group
US Nat Gas January Futures Contract trades at USD 3.182/MMBtu which is 21.6% below the five-year average.
Amid the fundamental forces at play, this paper posits a hypothetical trade setup of long CME Micro Henry Hub Natural Gas January Futures Contract (expiring on 26/Dec) at USD 3.150/MMBtu with a stop at USD 2.840/MMBtu and target at USD 3.60/MMBtu resulting in a reward-to-risk ratio of 1.45x. Each Micro Henry Hub Nature Gas Futures contract has 1,000 MMBtu
Over the past five years, Henry Hub prices typically declined from mid-November to year-end. The rapid surge in US LNG exports to Europe, now nearly half of the continent’s imports, is expected to offset any moderation in US heating demand.
Standard Henry Hub Futures can be used in the same way as the Micro Henry Hub Futures to express a bullish outlook on the US LNG market.
Unlike the standard CME Henry Hub Natural Gas Futures contract, the micro contract requires a margin of USD 258/lot as of 19th November 2024.
• Entry: USD 3.150/MMBtu
• Target: USD 3.600/MMBtu
• Stop-Loss: USD 2.840/MMBtu
• Profit at Target: USD 450/lot
• Loss at Stop: USD 310/lot
• Reward-to-Risk Ratio: 1.45x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
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