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Natural Gas Outlook: U.S. Sanctions on Nord Stream 2 Push LNG Higher

NATURAL GAS (HENRY HUB) ANALYSIS

  • U.S. continues opposition of Nord Stream 2 pipeline.
  • Russian supply uncertainty.
  • Colder U.S. and European weather forecasts keeps demand elevated.
  • Falling wedge resistance break.
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LNG FUNDAMENTAL BACKDROP

“With today’s action, the Administration has now sanctioned 8 persons and identified 17 of their vessels as blocked property pursuant to PEESA (Protecting Europe’s Energy Security Act of 2019) in connection with Nord Stream 2.”Secretary of State Antony Blinken

LNG spot prices rallied yesterday and continues higher today after the U.S. imposed new sanctions concerning the Nord Stream 2 initiative (a pipeline built to connect Russia to Germany). The U.S. is concerned with Russia’s potential influence over the European region by using their energy supplies to pressurize countries within the area.

To compound the situation, Russia/Ukraine tensions are rising and reliance of Ukraine on the pipeline could be catastrophic going forward. Should Russia invade Ukraine, the U.S. benchmark (Henry Hub) could see a rally as European imports are likely to skyrocket. We are already seeing an increase from the European region (light blue) shown in the U.S. export chart below. Later today the U.S. Energy Information Administration (EIA) releases its weekly storage report (10:30 ET) which should bring some short-term volatility to the market – last weeks showed an uptick in stocks which saw marginal declines in Henry Hub contract prices.

LNG EXPORTS BY REGION:

U.S. LNG exports by region

Chart prepared by Warren Venketas,Refinitiv

Weather in the U.S. and Europe are expected to be cold which should require more demand for energy. To measure the demand for energy when temperatures are cold, the Heating Degree Day (HDD) is used. The graphic below shows the steady increase in HDDs with actual levels exceeding the 10-year rolling normal for most of 2021. This is expected to extend into December which could lead to higher LNG prices.

U.S.-LOWER 48 HDD DAYS LATEST GFS VS NORMAL:

U.S. heating degree days forecast

Chart prepared by Warren Venketas,Refinitiv

The supply side shows a slight uptick in inventory as per last week however, compared to last year and the 5-year average current inventory data is significantly lower. This supports the present bullish bias surrounding LNG spot prices.

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NATURAL GAS TECHNICAL ANALYSIS

NATURAL GAS (HENRY HUB) DAILY CHART:

Natural Gas Henry Hub daily chart

Chart prepared by Warren Venketas, IG

The daily LNG chart above shows a breakout from the falling wedge formation which traditionally points to a bullish continuation. Prices have broken above wedge resistance a few times since October but were unable to close (daily candle) above. The wedge break coincides with the 5.000 psychological zone which has maintained it’s pull of recent, indicating market hesitancy and the need for a directional catalyst. If today’s candle close remains above wedge resistance and the 5.000 level (potentially due to lower U.S. inventories), the outlook would favor additional upside.

The Relative Strength Index (RSI) remains around the midpoint 50 level which supports the uncertainty surrounding market participants.

Resistance levels:

  • 5.500
  • 20 and 50-day EMA’s

Support levels:

  • 5.000
  • 4.729 – recent swing low

Contact and follow Warren on Twitter: @WVenketas

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