Slump in gas prices approaches major target

Natural gas quotes in the U.S. continue their slump. Despite the technically oversold condition, gas prices are regularly reaching lows for more than 3 years. At Wednesday's trading session, the bears dropped the price under the level of 1.6. Now the road to the main target of the downward movement is open to the level of 1.516, where gas prices formed a bottom in the summer of 2020. This level can be reached already in the coming days.

A set of factors ensuring an extremely depressive situation on the U.S. gas market remained almost unchanged. Gas production, which fell sharply during the January cold weather, has almost fully recovered to the historical records of the end of last year. At the same time, temperatures in most parts of the U.S. remain above normal levels for winter, and fuel inventories are already 15% above the seasonal average.

An additional reason exerting pressure on gas prices was the failure of one of the liquefaction units at the Freeport LNG export plant in Texas. Industry analysts surveyed by Reuters do not expect U.S. LNG exports to recover to record levels until Freeport LNG returns to full capacity. According to forecasts, this is unlikely to happen before the end of February.

Some gas producers, in particular Comstock Resources, have already reported production shutdowns at a number of wells due to low prices. But even if gas companies cut production, the surplus still won't disappear. Oil prices are high enough to stimulate oil production in the fields of Texas, New Mexico and North Dakota. Along with the oil in these shale basins, a lot of associated gas comes out of the ground. This fact will continue to have a negative impact on gas prices.

As the price approaches 1.516, traders in the gas market should be cautious. Many market participants will want to take profits from short positions, which may cause a sharp rebound in the price. It is better to set the Take profit level a little higher, for example, in the range of 1.52–1.55.

The following trading strategy may be offered:

Sell gas in a range of 1.6–1.7. Take profit 1 – 1.55. Take profit 2 – 1.52. Stop loss – 2.