Natural Gas Forecast: Prices Rise on Declining Rig Count Despite Low Short-Term Demand

Natural Gas Highlights

• Natural gas prices trade higher despite low demand forecast.
• Declining rig count providing support. 
• Exploration companies reduce production as gas prices surge.

Natural Gas Overview

Despite new weather reports predicting low national demand, natural gas prices are trading higher on Monday. This upward movement is a continuation of the bullish trend that began on Friday, resulting in a 5% rally. The catalyst for this surge was a report indicating that the number of oil and natural gas rigs in the United States declined to its lowest level in nearly a year. Gas rigs experienced their largest weekly drop since February 2016, according to energy services firm Baker Hughes Co.

At 13:18 GMT, Natural Gas is trading $2.277, up $0.091 or +4.16%. On Friday, the United States Natural Gas Fund ETF (UNG) settled at $6.65, up $0.26 or +3.99%.

Declining Rig Count Sparks Gas Futures Surge

The U.S. oil and natural gas rig count fell this week to its lowest in nearly a year, with gas rigs experiencing the most significant weekly decline since February 2016, as reported by Baker Hughes Co on Friday. In response to this news, U.S. natural gas futures jumped over 5% as market participants anticipated that the reduction in rig count would lead to decreased output later in the year.

Rig Count Drops to Lowest Since June 2022

The oil and gas rig count, considered an early indicator of future production, dropped by 17 to 731 in the week ending May 12. This count represents the lowest level since June 2022, and the weekly decline was the largest since June 2020. Despite the decrease, the total rig count is up by only 17, or 2%, compared to the same period last year. By the end of 2022, the rig count had increased by 193 rigs over the prior year.

Exploration Companies Cut Gas Production

Gas prices decline, prompting production cut. Exploration companies, including Chesapeake Energy Corp, Southwestern Energy Co, and Comstock Resources Inc, plan to reduce gas production. Cuts focus on gas rigs in the Haynesville shale region. Haynesville rig count drops to 57, lowest since Feb 2022, per Baker Hughes.

In the Eagle Ford shale region in South Texas, the rig count also decreased by two this week to 62, reaching its lowest level since May 2022.

Mixed Patterns Impact Natural Gas Demand

According to the NatGasWeather forecast for May 15-21, the United States will experience an active weather pattern, characterized by heavy showers and thunderstorms. However, apart from the West Coast, where strong high pressure will result in record-breaking heat and temperatures in the 80s-90s, the rest of the country will enjoy comfortable temperatures ranging from the 60s to 80s. Consequently, national demand for natural gas is expected to remain relatively low.

During Wednesday and Thursday, a cool weather system will move over the Upper Great Lakes and Northeast, leading to temperatures as low as 38-48°F. This cooler weather will likely drive higher demand for natural gas in those regions compared to normal conditions.

Technical Analysis

Natural gas is trading on the bullish side of the daily pivot at $2.168, putting the market in a position to exend the rally over the short-run. If the move continues to generate enough upside momentum then look for a possible near-term test of $2.638 (R2).

Look for the downside bias to resume on a sustained move under $2.168 with $1.962 (S1) the primary target.