Has Natural gas bottomed out?

European shift away from Russia brings volatility

Natural gas has been one the big losers over the course of the past six-months, with price falling 79% from its August high to last week’s low. Much of this represents an unwinding of the massive run-up in prices as Europe sought to replace Russian gas with imports from around the world. The chart below highlights how Russian gas has been switched out in favour of Norwegian pipeline and shipped LNG imports.

Fortunately, Europe has seen a relatively mild winter, dispelling speculation that a cold winter could see stockpiles run dry and European desperation driving a further spike in prices. While we have not seen that come to pass, the calls for a crisis next winter have also started to fade. Below we can see the European stockpiles remain highly elevated, with levels well above those seen in recent years. The EU energy commissioner Kadri Simson said that he expected stocks to remain above 50% by the time the heating season was over.

EU approaching transition from drawdowns to fresh stocking

Looking at the current breakdown of EU gas flows, we can see that this winter has brought a significant amount of demand destruction as highlighted by the Christmas dip in withdrawals. We are yet to head into the injection phase which will be key in signalling the beginning of a new period where the EU start restocking. That transition away from drawing down supplies and towards a fresh importing phase does bring the potential for a resurgence in prices.

Monthly close signals potential bottom

The monthly close seen this week does bring a significant bullish signal for natural gas, with February bringing a huge hammer that saw 23% lost and regained. Looking back at the lows in 2009, 2012, 2016, and 2020, this hammer candle does signal the potential for another bottom within the same $1.50 to $2.40 zone.

Daily chart sees price break resistance

The daily chart backs up this potential bullish shift, with price having pushed up through the $2.69 swing-high this week. That mark the end of a long-standing pattern of lower highs, bringing increased confidence for the bulls. As such, further upside looks likely unless price falls back below the recent low of $2.104