Natural Gas Analysis: Price Continues to Soar as Nicholas Slams the Gulf

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Natural Gas, Commodities, Federal Reserve, Inflation – Talking Points

  • Natural gas futures extend beyond $5.00 MMBtu as supply worries grow
  • Hurricane Nicholas adds insult to injury, further shutters production
  • US CPI shows slowing inflation, yet energy prices continue to soar higher
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Natural gas prices continued to roar higher on Tuesday as fears over significant supply shortages continue to mount. As Nicholas made landfall, prices of energy futures rose after market participants raced to price in additional supply shortages following the arrival of Hurricane Ida. Gulf Coast output lagged behind demand in the weeks leading up to Ida. Hurricane Nicholas complicated those output production woes further.

Potential flooding and severe wind stemming from a strengthening Nicholas could potentially shutter production from Texas to Alabama. Instances of extreme weather provide market participants with the opportunity to add significant premiums to commodity prices, as seen in recent price action. Higher energy prices further complicate the “transitory” inflation narrative, as the Federal Reserve seeks to calm households over recent price increases. Despite Tuesday’s CPI print, households and businesses may continue to worry should energy prices continue to rise at the current pace.

Hurricane Nicholas Potential Path

Natural Gas Analysis: Price Continues to Soar as Nicholas Slams the Gulf

Courtesy of Google, NOAA

In my previous natural gas piece, I discussed that the fundamental outlook positioned natural gas for a potential and retest and breakout of the $5.00 MMBtu level. Currently, natural gas futures are in “overbought” territory on the daily relative strength index (RSI), indicating that price may have come too far too fast. While that does not necessitate a pullback, market participants should be wary of the potential for supply to return to the market in the near-term as Nicholas subsides. With markets often looking to the future, Nicholas and its impacts may already be priced in.

Natural Gas Daily Chart

Natural Gas Analysis: Price Continues to Soar as Nicholas Slams the Gulf

Chart created with TradingView

Taking this into account, a cooldown in price may see a retest of the psychological $5.00 level. Any additional cases of extreme weather or unexpected supply disruptions could see these futures contracts extend even higher to test the 1.618 Fibonacci extension at $5.69. While market participants may look for a slight pullback given the recent run, traders may want to retain an upside bias given the fundamental outlook. Until supply can return to equilibrium, price outlook should remain skewed higher.

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— Written by Brendan Fagan, Intern

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