Natural Gas Fundamental Analysis – Forecast for the Week of September 26, 2016

Natural Gas futures rallied to their highest level in months before pulling back into the end of the week amid heavy profit-taking due to technical and seasonal factors. The November NYMEX Natural Gas futures contract reached $3.166, its highest level since the week-ending August 14, 2015, before settling at $3.013, down $0.008 or -0.26%.

Early in the week, technical factors contributed the most to the price surge with enough aggressive buying taking place to drive the market through a series of previous tops. Technical traders had been watching the price action recently in preparation for the breakout move. The cited aggressive short-covering as the main reason for the price surge in a move called a “short-squeeze”.

A short-squeeze occurs when a wall of buyers line-up under a key resistance area, encouraging overwhelmed short-sellers to cover positions at any price possible just to protect their profits. The buyers essentially apply continuous pressure to “squeeze” the short-sellers out of the market.

The technical moves were just a part of the scenario, however. Fundamentally, we’ve seen a shift in the supply and demand situation over the course of the summer and now into the fall.

Hot temperatures throughout the summer had helped draw down supply that had been at record levels. The lingering heat in September also helped to decrease the amount of natural gas being put into storage. This is occurring at a time when gas injections tend to be weak.

By the end of the week, the November Natural Gas futures market couldn’t hold on to its earlier gains as investors took profits after the release of the U.S. Energy Information Administration’s weekly inventory report.

The report showed that supplies of natural gas rose 52 billion cubic feet for the week-ended September 15. This was slightly above the 52 bcf estimate.

FORECAST

Traders should expect to see relatively low natural gas demand in the northern U.S. and moderate to high demand over the southern U.S. These two events are likely to cancel each other, which will mean the focus for traders will be on this week’s injections.

Last Thursday, the EIA reported that natural gas inventories increased by 52 bcf, which was the second smallest weekly injection for the third week of September on record. This is a sign that producers are cutting output.

Because of the low injections and the lingering heat in some parts of the U.S., we could be looking at a persistently tight market. If injections continue to remain low during the October to December period, a time when they generally are, natural gas inventories could transition from a storage surplus to a storage deficit by December.

Last week’s sell-off was a normal reaction to the inventory news especially since the last price surge was fueled by aggressive short-covering rather than aggressive buying. The fundamentals remain favorable so I expect to see buyers coming in on the breaks after natural gas futures pull back into a value zone.