Natural Gas Fundamental Analysis – Forecast for the Week of October 24, 2016

Natural gas futures failed to follow-through to the upside following the previous week’s strong gain as investors reacted to the forecast for persistently warm temperatures throughout most of the U.S. December Natural Gas futures finished the session at $3.361, down 0.1420 or -4.05%

Last week’s price action indicates that price may be a little ahead of time since the weather hasn’t turned cold enough to lead to a substantial increase in demand. The unseasonably warm temperatures this fall are also hurting demand since the weather isn’t cold enough to increase demand and also not hot enough to encourage consumers to turn on their air conditioners.

According to the U.S. Energy Information Administration, natural gas supply rose 77 billion cubic feet for the week-ended October 14. This was slightly above the 72 billion cubic foot rise expected by analysts.

Total stocks now stand at 3.836 trillion cubic feet, up 46 billion feet from a year ago and 185 billion cubic feet above the five-year average, according to the government data.

Forecast

We’re in a weather market so obviously we’re going to look at the weather first. According to natgasweather.com, during the October 20 to October 26 time period, a cool front will be pushing through the east-central U.S. Temperatures are expected to be low normal. However, temperatures are expected to be in the 70’s and 80’s out ahead of this system with near 90’s over the Southeast.

As it pushes into the eastern U.S. this weekend, it is expected to tap into colder Canadian air and bring a surge in natural gas demand to the Northeast.

Temperatures are now warming over the West as high pressure returns, including temperatures in the 90’s in major California cities. Early next week, the west-central U.S. will warm above normal with the eastern U.S. slightly cool.

Overall, natural gas demand is expected to be moderate.

The key word at the start of the week is moderate. This means we could see early downside pressure to start the week. The market is getting close to a value zone, however. This area is $3.334 to $3.282. If speculative buyers are going to return then it will probably be on a test of this area.

Basically, look for early downside pressure to drive the market into the value zone. Technical investors may start to come in to stop the price slide, but don’t expect much movement away from this zone until the forecast calls for cold temperatures.

Given the current supply/demand situation, we’re going to have to see an early cold snap in November to make up for some of the lost demand this fall. If we get that then this will set up a strong rally once we get persistent cold during the winter.