Natural Gas Forecast: Weaker Amid Profit Taking, Lower Demand Expectations

Highlights

• Natural gas futures drop on profit taking.
• Reduced gas exports from Canada, lower wind power generation affect prices.
• Revised demand forecasts, maintenance work contribute to market fluctuations.

Overview

U.S. natural gas futures are lower at the mid-session on Tuesday after a significant drop of approximately 7% on the previous day. Yesterday’s and today’s weakness is being primarily attributed to traders capitalizing on profits following a 14% surge in the contract’s value during the previous week.

Analysts from energy consulting firm Ritterbusch and Associates attributed the downward pressure on the prompt June gas contract to bull spread liquidation and profit taking following the previous week’s strong advance.

Additionally, the market was influenced by increased gas output and revised forecasts indicating less demand in the upcoming week compared to previous expectations.

At 15:30 GMT, Natural Gas is trading $2.308, down $0.045 or -1.89%. The United States Natural Gas Fund ETF (UNG) is at $6.86, down $0.14 or -2.00%.

Gas Prices Drop Despite Increased Consumption

Despite recent weeks witnessing higher gas consumption by U.S. power generators due to low wind power, the drop in natural gas futures persisted. A contributing factor to the decline was the lower-than-normal gas exports from Canada, resulting from wildfires in Alberta.

Notably, wind power accounted for only 8% of total power generation last week, a significant decrease from the recent peak of 17% recorded during the week ending April 21.

This decrease in wind power generation implies a reduced availability of the fuel for storage. In contrast, power generated by gas reached 42% last week, up from a recent low of 37% during the windy week ending April 21.

US Gas Output Surges, Canada’s Flows Decrease

Data provider Refinitiv reported an increase in average gas output in the U.S. Lower 48 states during May, reaching 101.5 billion cubic feet per day (bcfd). This figure is expected to surpass April’s monthly record of 101.4 bcfd.

Meanwhile, gas flows from Canada to the U.S. were significantly reduced due to wildfires, with the average amount of gas flowing averaging just 7.0 bcfd in recent weeks. This is below the average of 8.4 bcfd exported from Canada to the U.S. since the beginning of the year and the average of 9.0 bcfd in 2022. Canada typically accounts for around 8% of the gas consumed or exported by the U.S.

Weather Forecasts Shift U.S. Gas Demand

Meteorologists predicted that weather conditions in the Lower 48 states would mostly remain near normal until June 6. Refinitiv’s forecast indicated a decline in U.S. gas demand, including exports, from 90.2 bcfd in the current week to 89.5 bcfd in the following week. Notably, this week’s forecast was higher than the previous outlook, while the forecast for the next week was revised downward.

US LNG Exports Decrease Amid Maintenance Work

Gas flows to the seven major U.S. LNG export plants decreased from a record 14.0 bcfd in April to an average of 12.9 bcfd so far in May. This decline was attributed to maintenance work at various plants, including Cameron LNG in Louisiana and Cheniere Energy Inc’s Sabine Pass, also located in Louisiana.

Despite the reduced flows, the record level of gas exports in the previous month exceeded the LNG production capacity of the seven major plants, as some of the fuel is utilized to power the equipment involved in LNG production.

Technical Analysis

Natural gas hit its highest level since March 22 on Friday before running into resistance and closing lower. This has led to a shift in momentum to down. The market is also trading on the weakside of $2.432 (R1), making it new resistance. Overcoming this level will indicate the presence of buyers with $2.638 (R2) the next target.

A sustained move under $2.432 (R1) will signal the presence of sellers. If this generates enough downside momentum then look for the selling to possibly extend into $2.168 (Pivot).

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