Exaggerated Low-Volume Nat Gas Rally Fizzles into Close

Natural gas futures spiked to within striking distance of its high of the year on Wednesday after newly released forecasts called for cooler temperatures and higher heating demand over the next two weeks than previously expected. However, buyers were unable to hold onto those gains and the market turned lower into the close.

Meanwhile, record demand for U.S. Liquefied Natural Gas (LNG) exports continued to underpin prices.

Traders also continued to take advantage of low open interest and light volume with most major players preparing for the start of the spring shoulder season. The price action suggests buyers caught weak short-sellers off-guard, sending them scrambling for cover and overpaying to liquidate their positions. Therefore, we’re calling this an “exaggerated low volume” rally

At 20:23 GMT, May natural gas futures are trading $5.164, down $0.063 or +1.21%. The United States Natural Gas Fund ETF (UNG) settled at $1801, down $0.08 or -0.44%.

Domestic Demand Expected to Rise then Retreat

With cooler weather coming, Refinitiv projected average U.S. gas demand, including exports, would rise from 96.4 bcfd this week to 102.6 bcfd next week. Those forecasts were higher than Refinitiv’s outlook on Tuesday, Reuters reported.

Even though it will be cooler next week, meteorologists forecast U.S. weather will remain at near normal levels through at least early April, which should keep heating demand low enough to allow utilities to inject gas into storage this week – about a week earlier than usual. In two weeks, however, supply and demand forecasts were about even and utilities will likely leave stockpiles little changed.

Near-Term Weather Forecast

The weather outlook on Tuesday shifted from decidedly bearish for natural gas demand to closer to seasonal for the final stretch of March and the beginning of next month, Natural Gas Intelligence (NGI) reported.

“It is basically a normal pattern from this weekend on into the early part of April, with a good deal of variability across the nation,” Bespoke Weather Services said.

EBW Analytics Group said the variability could come in the form of cooling across the Northeast. That could add “late-winter heating demand at the same time warmer temperatures across the southern tier of the country stimulate early-season cooling demand.”

Short-Term Outlook

With production and demand rising over the short-run, LNG demand is likely to remain supportive. Demand for LNG exports amid supply shortages in Europe during Russia’s invasion of Ukraine continues to drive bullish market sentiment.

LNG volumes held around 14 Bcf early this week, according to NGI estimates. Those record volumes eclipsed the high-13 Bcf level that many in the industry thought was the U.S. capacity.

I can see where LNG demand could be supportive throughout the year especially if Europe tries to wean itself from dependence on Russia for gas, however, I think the rally is a little exaggerated for this time of year. Wednesday’s potentially bullish technical reversal on the daily chart supports this outlook. This chart pattern typically indicates the selling is greater than the buying.