Natural Gas Forecast: Hot Weather, Low Output Fail to Sustain Early Rally

Highlights

• U.S. gas futures rally hits snag despite early strength. 
• Lower-than-expected storage build catches bears by surprise. 
• Future gas prices projected to be bearish amid slackening demand.

Overview

Despite the promising upward movement of U.S. natural gas futures on Thursday, the rally appears to have stalled on Friday. The futures, which grew by approximately 4% on Thursday due to lower-than-expected weekly storage build and forecasts of reduced output coupled with hotter weather, struggled to maintain traction, underlining concerns about demand.

Storage Build Underperforms Expectations

Thursday’s price increase came amidst the decline in the amount of gas flowing to U.S. liquefied natural gas (LNG) export plants. The U.S. Energy Information Administration (EIA) reported a smaller than expected storage build, with utilities adding 14 billion cubic feet (bcf) of gas into storage for the week ending July 28. This number was notably less than the 17 bcf predicted by analysts and the five-year (2018-2022) average increase of 37 bcf.

Heatwave Spurs Record Texas Power Demand

The low storage build was attributed to power generators consuming record amounts of gas for three consecutive days last week to keep air conditioning running during an extreme heat wave. Power demand in Texas, in particular, reached an all-time high at the start of the week and is likely to break records again in the coming days, as per the Electric Reliability Council of Texas (ERCOT).

US Gas Output Drops, Demand Rises

Considering the supply-demand equation, data provider Refinitiv stated that the average gas output in the U.S. Lower 48 states has dropped to 101.6 billion cubic feet per day (bcfd) so far in August, down from 101.8 bcfd in June. In contrast, gas demand, including exports, is projected to rise from 104.7 bcfd this week to 105.2 bcfd next week, owing to the expected increase in pipeline and LNG exports. Simultaneously, gas flows to the seven major U.S. LNG export plants fell from an average of 12.7 bcfd in July to 12.1 bcfd in August.

Short-term Outlook Bearish for Gas

In the short term, the future of natural gas prices appears to be bearish, given the slackening demand and the fact that the early attempt at an upward surge failed to generate substantial momentum. The situation continues to be fluid, and developments should be monitored closely.

Technical Analysis

The current Natural Gas market sentiment leans slightly bearish. The current 4-hour price of 2.565 is below both the 200-4H and 50-4H moving averages, suggesting a downward trend. Despite the 14-4H RSI of 49.17 indicating slightly weaker momentum, it remains near the neutral zone, hinting at a balance between buyers and sellers. The current price sits just above the main support area of 2.487 to 2.542, indicating potential resilience. However, the price is far from the main resistance area of 2.782 to 2.836, suggesting a need for strong buying pressure to reach this level. Overall, close market monitoring is advised.