Natural Gas Prices: Highly Volatile in 2021

Jan 8, 2021 02:40 PM ET
Natural Gas Prices: Highly Volatile in 2021
  • The first quarter of 2021 may not support the bullish prices of natural gas. The new coronavirus has curtailed movement and is likely to destroy energy prices.
  • Turkey has emerged as a significant consumer of natural gas, importing more than 3.5 billion cubic meters into 2021.
  • The Southern Gas Corridor’s plan to wrest the Russian dominance of the European gas market may be challenged by the latter’s geopolitical control in the Middle East.

Natural gas futures have risen by 80.36% since June 2020. The high volume of imports and exports between the Middle East and Russia have contributed to high gas prices. Additionally, gas stock estimates into 2021 are expected to fall, based on underground storage capacity. Finally, economic growth is expected to steer consumption, which will increase natural gas prices in the year.

Natural gas futures

Export and Import Dynamics

Imports of natural gas from Turkey increased by 28% YoY in October 2020. Recent data shows that the country’s gas imports improved, rising to approximately 4.04 billion cubic meters (bcm) in October 2020 from 53.15 bcm in October 2019. It used pipelines to import 3.24 bcm of natural gas (an increase of 36.2%), while 795 million was imported as liquefied gas – LNG (a gain of 2.5%).  

Turkey has become a significant player in the natural gas market. Its total gas consumption was up almost 24% to 3.57 bcm in October 2020 from 2.88 bcm in 2019. 

Consumption was significant in power plants as compared to households. Among the countries that supply Turkey with natural gas are the US, Norway, Greece, Spain, and Algeria. Countries like Kazakhstan and Azerbaijan are also emerging as strong natural gas exporters toppling powerhouses like Russia.

As of Q1 2020, Russia was the leading exporter of 30% of crude oil and 40% of the EU's natural gas. However, the EU’s long-awaited project, the Southern Gas Corridor (SGC), is set to begin the supply of natural gas from the Middle East to Europe, thus, overcrowding Russia's dominance in the market. While this project is touted as a possible replacement for Russia, it may only negotiate prices in the short-term.

The SGC plans to deliver approximately 10 bcm of natural gas annually to Europe and 6 bcm (annually) to Turkey in the next 25 years. Italy is to get the 8 bcm, the largest share of the 10 bcm per annum export and the rest to the surrounding market including Greece and Bulgaria. However, Russia's dominance in the natural gas market is maintained by strong geopolitical strings such as in Armenia and Azerbaijan. Natural gas prices have soared in 2021, with the introduction of the SGC pact. This indication shows that the increase in gas supply will continue accelerating demand throughout 2021.

Winter in the US and Europe is expected to increase natural gas demand. The impact on gas prices is expected to be more significant as a transmission system in the SGC runs near full capacity. This condition explains why spot prices are above the 52-week average of 2.414 MMBTU.

Technical Analysis  

  Natural gas futures

Natural gas futures for February 2021 indicate a gloomy position for gas prices. The 50-day exponential moving average (EMA) shows gas prices will reach a resistance level at 2.687. However, this is in the short term.  The 50-day SMA shows a higher trendline at 2.691, while the 20-day EMA is more elevated at 2.689. The 100-day exponential moving average supports a buy position at 2.647. High volatility is expected throughout the year. In the short-term, a sell position is established since there is a new strain of the coronavirus affecting parts of Europe, the UK, and China. New lockdown measures are expected to curtail movement and energy consumption. However, in the long-term, we foresee a bullish run for natural gas prices due to the rollout of the COVID-19 vaccine.

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