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Chris Weston
Head of Research
6 Oct 2021
All the talk on the floors, on social media and through broad markets, has been around Nat Gas (NG) and it's been deafening.

We’ve seen EU and UK NG prices absolutely flying on the re-open, with UK NG futures up 40% early on, taking the recent bull run to 312% in 33 days. US (NYMEX) NG prices trading to $6.42 – just shy of the $6.49 high we saw on 24 Feb 2014, and traders were keenly watching to see if price could close above here – it also took the moves from the April low to 163%.

With price above $6.40, and eyeing a further extension into $6.50, we’ve seen the DAX -2.4% and S&P 500 futures -1.4% - risk was getting hit as traders feared stagflation risks were on the march and questioned how on earth do central banks deal with a stagflation event driven by a supply shock?

What’s more, with EU gas futures effectively doubling in two weeks, we ask how does this play out on economics when the likes of Italy source about 40% of its energy needs from gas, the UK close to 40% and the US 37%. Gas prices matter and the market knows it. We know systematic players like the CTA (commodity trading advisors) and trend-following crowd have largely been behind this move higher, however fundamentally, we’re going into a winter period with inventories far lower than where they’d typically be at this time of year.

While coal is where we need to be watching, when it comes to inflationary dynamics, we can’t forget crude moves either, with Brent crude pushing above $83, while spot LNG prices hit a record in Asia, with the single biggest one-day advance ever.

The energy factor is not confined to one jurisdiction but is a global phenomenon and inflation expectations across developed markets ripped higher. The cynicism towards the widely held view from DM central banks of ‘transitory’ inflation was expressed clearly in selling across bond markets – again, when there are limited signs of demand destruction and the move is parabolic, and we know this is inflationary and central banks can’t solve this, markets need to wear a higher risk premium.

In steps Russian President Vladimir Putin – a moment many had been expecting – promising to export greater quantities of gas to Europe and beyond current contracted volumes. There are conditions of course, and one of these could be to rubber stamp the Nord Stream 2 pipeline. Whether this is truly the answer to the unfolding energy crisis is yet to be seen, as we have our eyes on weather patterns and winter temperatures in Europe, UK and parts of the US, and a potential inventory build - but in a market so stretched – price was pushing 2.5 standard deviations from the 20-day MA - it was the smoking gun to cause a punchy reversal.

Natural Gas vs US Dollar


(Source: Tradingview - Past performance is not indicative of future performance)

So the elastic band was primed. The divergence crowd saw a triple divergence (between RSI and price) and this is playing out, with price also printing a strong bearish engulfing – so we’re seeing a change of market structure that could be defining. We’ll watch for follow-through selling here, with price holding the 15 Sept high – it takes a brave soul to make a call here given implied volatility is so incredibly high – but follow-through selling on open may take this into the low $5 range.

What’s interesting is that as gas prices fell, so too we saw good buying in risk assets like equities and buyers of bonds. When inflationary pressures are central to the narrative - Nat gas, crude, and energy more broadly matter to markets – keep them on the radar.

For those looking to express a view, you can trade Nat gas, SpotCrude or SpotBrent as CFDs or trade a broad range of ETFs on Nat gas and energy more broadly with Pepperstone.

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