NYMEX natural gas futures tumble amid 'risk reduction' before holiday weekend

NYMEX front-month natural gas futures fell significantly June 17 amid a wave of "risk off" liquidation trading action.

At the end of trading the NYMEX July gas futures contract tumbled 52 cents to close at $6.944/MMBtu. In under two weeks, after topping out at around $9.66/MMBtu on June 8, NYMEX gas futures have fallen by 28%.

It was a lousy day for energy market bulls as NYMEX WTI oil futures and Henry Hub natural gas futures prices tanked. In addition to the hefty decline in gas, which bottomed out at an intraday low of $6.881/MMBtu, the NYMEX July WTI oil futures contract shed $8.03 to close at $109.56/b.

Part of the bearish trading action stemmed from hedge fund accounts that have been trapped in long positions in various rapidly sinking asset classes, including equities, energy futures, and bond markets. Over the week, major selloffs in the markets have increased fears of steeper losses amid the potential for a looming recession as inflation has affected energy, food and housing.

Sector selling

The heavy selloff in NYMEX energy futures may have also resulted from 'sector selling' on behalf of hedge fund accounts reducing risk in commodities within certain sector groups, rather than individual selling of one particular energy commodity. Reducing risk from a "percentage" perspective in sectors is a common strategy among funds during times of elevated financial duress in the economy or markets. Energy futures traders also removed long-sided risk as there is an extended weekend in the US observing the Juneteenth holiday. Rumors were circulating through the market that some geopolitical risk could find some resolution, which could be deemed notably bearish for NYMEX energy futures when market players return to work. Obviously, this is a speculative stance and remains to be seen.

Freeport and storage

Another bearish catalyst pressing prices lower is that NYMEX gas futures are attempting to find a new equilibrium after the Freeport LNG terminal shut in. The Freeport LNG facility could be largely out of service for the remainder of the gas storage refill season, which will help to bolster gas storage inventories in the weeks and months ahead and reduce the chance of supply crunch in the winter.

The days of $9.00/MMBtu or higher NYMEX front-month gas futures are gone. However, with dry gas production oscillating under 96 Bcf/d and the June temperature outlook continuing to look unseasonably hot in the central/midsection of the US, gas market bulls still have some ammo on their side. Still, with the 2022 Hurricane season poised to ramp up tropical activity in just the weeks ahead, gas market players are also beginning to price in risk as it applies to possible threats to LNG export facilities along the Gulf coast.

Despite the major selloff, if the forecast heatwave across most of the Lower 48 states comes to fruition, gas market bulls may lift the front month up to the $7.50/MMBtu level. This, however, is contingent upon the stabilization of NYMEX energy futures prices following the long holiday weekend. Should another wave of exodus selling unfold, it could set the stage for bears to test the $6.80s/MMBtu, followed by further weakness down to the $6.50s/MMBtu or lower.