Traders that have taken a long position on Natural Gas will have been feeling lighter than air for the better part of 2021. Remarkably, the trading price of Natural Gas has rocketed up 115% since the beginning of the year, outperforming price increases in other commodities currently sitting close to record highs, Oats (up by 63.83% YTD), Copper (up by 19.65% YTD), and steel (up by 38.27% YTD). As of writing, Natural Gas is trading at $5.592 per million British thermal units, a thirteen year high for the commodity.
An unusually scorching 2021 summer in the US drove demand for air conditioning and Natural Gas beyond normal levels, resulting in a lower stockpile of the commodity for an unusually cold winter. Following this, extreme weather conditions, such as Hurricane Ida, interrupted Natural Gas extraction in the Gulf of Mexico's most productive zone.
Typically, when the price of a commodity rises, new investment will enter the market to scoop up the high prices. Regarding Natural Gas, the new investment could be from gas companies lifting output at existing gas wells or exploring new wells that will raise production. Counter-productively, the new investment and resulting lift in gas supply would help suppress the price rises in the commodity.
New investment in Natural Gas has stalled as of late. While fossil fuels will still be needed for a long time, so-called 'Zero Carbon' policies from governing bodies worldwide are disincentivising Natural Gas exploration. The long-term prospects of Natural Gas wells are less certain and less attractive when contending with the likes of the Biden Administration throwing its full support behind renewable energy sources as the US engages in a wide-scale upgrade to its infrastructure. One project for the Biden Administration is for the US electric grid to be powered by 50% solar within the next thirty years. Achieving this goal would severely squeeze demand for Natural Gas, which, according to the EPA, generated approximately 40% of the country's electricity in 2020.
In this video, Philip looks at possible trading zones to eye for future movements in the commodity.