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Just like crude oil, natural gas prices were on a long term bullish trend until the middle of the previous decade, as the demand for energy products kept increasing. Natural gas topped at $16.50 in December 2005, although buyers attempted the top side once again, falling short at $14.30 during H1 of 2008. The pressure has been on the downside since then, with gas falling to less than 10% of the value, compared with the high in 2005. The world is changing and the consciousness has been shifting from fossil fuel to renewable energy, which has lowered the demand for all fossil energy products. Producers and investors are aware of the increases and declines in demand, so they adjust the output and invest in projects to balance the supply according to the demand. However, the long term trend looks bearish, and fundamentals are also bearish, which means that the downside pressure will continue in the longer term, despite the reverse higher in the last few months, and the continued increase in consumption, which is likely to shift at some point.

As mentioned above, natural gas posted a record high in 2005, but after the 2008 crisis, the situation changed forever. Before that, oil and gas were closely correlated, since both energy commodities are extracted. But, the global consciousness has been shifting towards energy-efficient products, which has sealed the fate for the eventual demise of fossil fuels, such as oil and gas. Of course, the demand for gas is seasonal, with spikes during fall/winter, which might give the wrong impression during those times, but the price has been making lower lows for many years, falling to $ 1.529 by June this year, as the coronavirus lock-downs dampened the demand further for everything, apart from safe havens, and not just for gas and oil. The demand of the recent months looks like a dead cat bounce, so we expect the top side to be limited in gas, with minimal gains, if any, in the coming months, while the larger bearish trend will resume sooner or later, and sellers will push the price to new lows in the coming years.

Natural Gas Price Prediction for the Next 5 Years

Risk Sentiment Commodities – How is the Risk Sentiment Affecting Natural Gas?

As we know, safe havens like gold are negatively correlated to the sentiment, while commodities are positively correlated to the sentiment in financial markets. When the risk sentiment is on, commodities run higher, and when the sentiment is negative, they turn bearish. But, natural gas is not really bound to investor sentiment too closely. We have seen many steep jumps and reversals during the past two decades, but they haven’t been as a result of the sentiment. We did see a crash during/after the 2008 crisis, as the sentiment hit commodities really hard, but that had already started several months before. During the economic recovery in the following years, other commodities increased, but natural gas didn’t. Instead, it has been in a long-term bearish trend since 2005. This year, it seems that the sentiment was driving gas prices down in Q1, then up in Q2 and Q3. But, that has more to do with the USD than with the sentiment. So, the verdict is that investor/risk sentiment doesn’t affect natural gas too heavily, and we should concentrate more on the sentiment regarding natural gas itself.

Supply Outstrips Demand in the Long Term

Apart from the sentiment, supply and demand are the factors that drive the prices of commodities hardest, most of the time, especially in the long run. While the supply and demand have been increasing continuously for natural gas, as the IEA data shows in the charts below, the predictions for the future are not so bright, as the world is shifting from fossil fuels to renewable energy. This is clearly shown in the gas charts below, where we can see that the price fell from record highs around $ 16.50 in the 2000s, to $ 1.55 earlier this year. Many major companies are already writing off their assets in gas fields, and the worst is yet to come.

The Market Demand for Gas is Seasonal – The market demand for natural gas is very seasonal, since gas is the primary fuel or energy source used for heating or electricity, most of which is also used for heating or cooling. At times when summers are too hot, the demand increases, but the normal season for natural gas is during winter. Although, as trading usually goes, speculators like to buy the asset before the actual rise in the demand, as do storage companies, so the climb in gas starts well before winter, sometimes in the preceding summer, with the decline starting in early/mid-winter. This makes it much easier for traders who like to trade the long term charts. They basically buy in early fall, and sell in mid to late winter, in a rinse and repeat strategy. While buyers have no real guarantee that gas will turn bullish in fall, it is almost certain that at some point, in late winter, gas will turn bearish and resume the long-term bearish trend. This year was different, since the gas price declined during winter time and has been bullish since May, which would be strange in normal times. But the coronavirus lockdowns changed everything, so we are not in normal times now, and volatility has picked up, compared to recent years. The demand is expected to fall by a total of 4% during 2020, and then start getting back to normal, but the climate agreements will make sure that the public will have to reduce their use of gas and move towards cleaner energy sources. So, the recent increase of the last several months looks like a great opportunity to go short on natural gas, and the technical analysis supports this, as we will explain below. The long-term demand has been declining for fossil fuels, since the world is headed towards cleaner, renewable energy sources, which makes the sale trade in gas more tempting.

The demand for natural gas was on a constant increase

Source: IEA https://www.iea.org/reports/natural-gas-information-overview

Correlation between Natural Gas and the USD

The correlation between the USD and natural gas is negative, as with most other commodities. At first glance, it is not too difficult to see that the negative correlation between the USD index and gas prices hasn’t been particularly strong in recent decades. During the 1990s, they were both bullish, but they are supposed to be negatively correlated, so this meant the negative correlation wasn’t there. During most of the 2000s, the USD turned bearish, while gas remained on a bullish trend, so the correlation increased somewhat, but while gas topped in 2005 after the big spike, the DXY bottomed in 2008, which again doesn’t show much of a correlation. Even the size of the moves in both assets weren’t comparable, with the USD index gaining around 20% in value, while gas lost nearly 80% of its value. The DXY was on the increase until 2016. Gas prices, on the other hand, kept declining, but the USD has been trading within a range since then. So the weak correlation was lost once again. It only picked up this year, as the USD increased during Q1, and then it reversed down again, while gas turned bearish in the first three months, but has been increasing since then. But as we said, we are not living in normal times and the markets are mostly trading the USD now, so commodities that are quoted in USD have to follow the opposite direction. However, I don’t think that this correlation will last too long.

The DXY was trending higher during the ‘90s

Gas prices were also increasing during the ‘90s

Technical Analysis – Is Natural Gas Going to Break the 6-Year Range?

Natural gas traded on a bullish trend for decades, reaching a record high at $ 16.50s. Although the spike in 2008 was lower than the top figure in 2005, the shift in the bullish momentum in the fossil energy markets came in 2008, during the financial crisis. During the uptrend, moving averages provided some mild support on the monthly chart, which is the only one to take into consideration for technical analysis, since there is a lot of noise in the other charts, that is simply confusing for everyone.

The 150 SMA has provided resistance during periods when retraces were stronger

The trend shifted in 2008, and natural gas crashed lower, sending the price below all moving averages. These moving averages eventually turned into resistance during pullbacks higher, and they were really good indicators to sell the bounces in gas. When the spikes were larger, the 150 SMA (green) provided resistance; when the retraces higher were smaller, the smaller MAs, such as the 50 SMA (yellow), took over that job, and there was one occasion when the 200 SMA (gray) reversed the retrace in 2011. That moving average has been providing resistance since early 2017, and there was one occasion in 2018 when the price broke above that, but reversed at the 150 SMA. The price continues to remain below the 50 SMA, as the long-term bearish momentum continues, but in recent months, we have seen a bullish reversal, due to the increased weakness of the USD. Although, all odds point to an end of this bullish retrace, when the price catches up with the 50 monthly SMA again, and the long-term bearish trend is likely to resume from there. So, we are following gas prices, in order to open a long-term sell forex signal, as soon as that happens.

Crude Oil has been a good investment, since it keeps offering many long term and short term trading opportunities. In 2008 we saw a high of $147 in both, US WTI crude and UK Brent crude Oil, which meant that the demand was at all time highs, but it didn’t last too long, as the 2008 crisis hit the markets and crude Oil crashed lower. Buyers tried to recover the losses in the following years, but since 2012 UK Brent Oil has been on a declining trend. Nonetheless, trading opportunities have been numerous in both directions. The coronavirus breakout sent US WTI crude to all time lows at -$37.50, but the UK crude Oil held above the watermark level and is now reversing back up. Although, after such a climb since the middle of March, the upside has lost momentum and further gains are in question now, as the economic rebound slows, while new coronavirus cases keep coming and the media scaremongering is dampening the sentiment in financial markets. In this article, we will take a look at possible scenarios and factors that might affect crude Oil in the coming months.

Recent Changes in the Gold Price

UK Brent crude Oil used to be pretty flat in the 90s, apart from 1990, when it spiked higher as the GBP crashed lower. The 2000s were very bullish for crude Oil, with both US and UK crude Oil topping at around $147, but the last decade has been bearish for crude Oil. The USD strengthening has had some impact on falling Oil prices, particularly in 2014-15, but that has been a secondary factor, so the decline in Oil prices while the global economy was recovering during the last decade, with the demand for energy in constant increase, it’s not good news for Oil in the long term. At least Brent crude survived the crash in the first three months of 2020 without falling below $0/barrel and is now climbing higher. Although, the climb also has to do with the USD weakening during this time, while gains have minimized since early June, which shows exhaustion from buyers, so the upside seems limited now, until the end of 2020.

Brent Oil Price Prediction for the Next 3 Years

When analyzing crude Oil, either Brent or WTI, we must take into account a number of factors, since Oil is the ultimate risk commodity and therefore its price action is vulnerable to many international factors. Oil is the opposite of Gold, which is the ultimate safe haven, thus both are affected by the same events, only that the price action is negatively correlated. One of those factors is the USD price, which has impacted Oil prices from 2014 until 2015, risk sentiment is also an important factor, since commodities are very vulnerable to the sentiment in financial markets, apart from supply and demand, which are decided by Oil producers like OPEC o one hand, and the global economic performance on the other. We will look into these factors in the sections below, although so far in 2020 the Oil market has been very hectic, but we hope that it smoothes down in the months ahead.

Risk Sentiment and Brent Crude Oil – Sentiment Will Remain Volatile

The sentiment in financial markets has been mostly positive during the 2010s, as the global economy was recovering from the 2008-09 financial crisis. But, the sentiment hasn’t been exactly positive for Crude Oil. UK Brent Oil recovered after the 2008 crash, but the area around $127-$128 rejected the price twice, once in 2011 and once in 2012. The highs were getting lower in the following years, which shows that the sentiment was turning negative. In 2014 Oil took a dive and despite the 2016-2018 rally, the overall trend is bearish. The trade war between the US and China was a major factor in turning Oil bearish from 2018 until this year, when Oil absolutely crashed for a number of reasons. The weakening global economy of the last two years, the coronavirus shock, the USD surge in March, the shut-downs, the global recession of Q2 this year, the Saudis flooding markets with Oil, the increased uncertainty etc have all added to the negative sentiment, but there’s some hope as the global economy has rebounded  in recent months after the reopening. That said, most of the negative factors for the sentiment are still valid; the economic rebound is weakening, while the uncertainty remains high, with the coronavirus and the US elections coming in November. So, while the bounce of the recent months due to the reopening is impressive, I don’t see it being sustainable. Perhaps after the elections, the sentiment might improve further, but that still hasn’t helped Oil in during the past decade either.

Supply Vs Demand

Supply – The supply side of crude Oil is not very difficult to predict or calculate. Basically, the OPEC+ cartel decides what the production levels will be. Usually, the production is obviously adjusted to the demand, to keep prices from not falling too much, with OPEC or OPEC+ cutting the production, like the 9.7 million barrels/day that we saw in March, or increasing production. When the price of crude Oil reaches a certain level, the US shale Oil producers also increase production. That level is at around $50/barrel, which is roughly the breakeven level. The annual production has been at around 100 million barrels/day, but this year it has declined to 94.22 million barrels/day, as the demand declines.

Demand – The demand is a bit more difficult to predict, since it is decided by the performance of the global economy, and to some extent the expectations for the future. As the chart above shows, the consumption, which means the demand, has been in constant increase, from around 95 million bpd to above 100 million bpd. But, this year the consumption dived due to the coronavirus lock-downs, falling to 93.14 million bpd. Although, the demand has increased as the world reopened in June, but the uncertainty remains high, so investors will hold back on investment, which means that the demand will be dampened. Besides that, air travel remains very limited. In its closely-watched monthly report, the IEA concluded that reduced air travel would cut 2020 oil demand by an annual 8.1 million barrels per day to 91.1 million barrels per day, marking a decline of 140,000 barrels per day from its previous forecast a month ago. For the coming year, the agency cut its global demand estimate by 240,000 barrels a day to 97.1 million bpd. This will help increase the price of crude Oil somewhat next year, but Ido0ubt it will run anywhere.

Source:EIA

XPD/USD Correlation

While sentiment and crude Oil haven’t correlated during most of the time since 2010, there were times when the correlation was strong. Now let’s see how the price of UK Brent Oil has correlated with the USD. Looking at the weekly chart for both the DXY and UK Oil, the correlation seems stronger here, but it’s obviously negative, meaning that when the USD goes up, crude Oil goes down. UK Brent Oil was trading at around $147 in 2008, but ended down to $16 by March this year. The DXY on the other hand was trading at 70 points by 2008, while it reached close to 104 points also in March 2020. So, while the climb hasn’t been as dramatic as decline in crude Oil, there has been correlation nonetheless.

Since March the correlation between Oil and the USD index has increased

The correlation wasn’t very strong during the 2008 crisis and the aftermath, with the USD reacting but not as much as crude Oil, again in the opposite direction. But the correlation grew stronger as the years went by and since 2014 the correlation has been quite strong. During 2014-15 we saw a strong increase in the USD, while Brent Oil went through a major decline, falling from $116 to $27. During this year the correlation has also been strong, especially since March, when Oil crashed lower while the USD surged higher. The situation reversed by the middle of April and the USD has been on the decline, while Brent Oil has been climbing higher, although in the last few weeks the gains have been minimal for Oil, while the decline has also stalled in the USD, which again shows correlation.

Technical Analysis – Is Silver Going to Break the 6-Year Range?

The trend has ben bearish since 2012

Looking at the monthly Brent Oil chart, we see that during most of the 2000s, buyers were in charge, as the price surged from around $50 in January 2007, to $147 by July that year. The 20 monthly moving average (SMA – grey) was providing support from 2014 until 2016. But, the big crash came that same year, as the financial crisis hit the financial markets hard, especially the risk assets such as crude Oil. The price recovered well in the following years, reaching $127, but after failing during the second attempt at $128 and forming a doji candlestick on the monthly time frame, which is a bearish signal, the lows started getting lower, meaning that the pressure was shifting from bullish to bearish. Then the second crash came in, starting from July 2014 and stretching until January 2016, as Brent crude fell to $27. Brent Oil made a couple of hammer candlesticks in January and February 2016, which are bullish reversing signals after a decline and the reversal higher came. That lasted until September October 2018, when the price reached the 100 SMA (green) which rejected the price. That moving average was pierced in October that year, but that didn’t count as a break according to the forex textbook, since the price returned back below it before the month ended and the monthly candlestick closed below the 100 SMA. So, the 100 SMA turned into resistance in 2018, while in 2019 and 2020 the 20 monthly SMA (grey) has taken its place, rejecting the price twice, which was followed by another crash in Q1 o this year, as coronavirus hit the world. Although, there is light after the tunnel, as crude Oil has been climbing higher, following the doji candlestick in April, which was a strong bullish reversing signal. Although, the pace of the climb has slowed down considerably in recent weeks.

The uptrend has lost pace since June

That can be seen better on the daily chart. Here we can see that Brent Oil formed a hammer candlestick on April 22, which was followed by a bullish reversal higher, since it is a bullish reversing candlestick. UK Oil climbed from $16 in April to $44.40 in early June, which is a considerable increase, but since then the gains have been extremely hard and slow for Oil, posting only $46.20 in the first week of August. During this time, the 20 SMA has been a good indicator in supporting Oil, but I am afraid that once it gets broken, we might see a decline following.

Bottom Line

Crude Oil has been on a strong bullish trend from April until June, following the crash of the lock-down months. The sentiment improved as the world reopened and the economic indicators started jumping higher again. But, the initial optimism of May and June seems to be wearing out and the global economic rebound is not looking too strong, which is dampening the sentiment for risk assets and commodities. This can also be shown from the daily Brent Oil chart, where gains have been very minimal since early June. So, we see any further gains limited in Oil, and a further correction down, probably to $30 in the coming weeks/months, before probably turning bullish if US election and Brexit go smoothly. After all, Oil has been on a long term bearish trend, which does not change so quickly