Natural Gas Fundamental Analysis – Forecast for the Week of February 27, 2017

Natural gas futures finished the week sharply lower after meteorologists declared winter officially over. The price action suggests that final liquidation of long speculative positions may have taken place with the selling pressure taking out the November and May bottoms.

April Natural Gas futures closed the week at $2.787, down $0.164 or -5.56%. The only bright spot during the week for bullish traders was the strong short-covering rally from the week’s low at $2.641. This doesn’t mean the trend is getting ready to turn up, but it probably signifies extremely oversold conditions and the market’s need for a strong counter-trend rally to alleviate the tension and set up the next shorting opportunity.

The catalyst behind the selling pressure was the extremely warm temperatures throughout key demand areas in the U.S.

Traders also reacted to the U.S. Energy Information Administration’s weekly storage report, released on February 23. The EIA reported that U.S. natural gas stocks decreased by 89 billion cubic feet for the week-ending February 17. The consensus called for a draw of about 92 Bcf. However, this number fell inside the estimated range of 86 Bcf to 97 Bcf.

The 92 Bcf draw compares to the five-year average withdrawal of around 158 Bcf. Last year’s storage decline for the week totaled 117 Bcf. During the week-ending February 10, natural gas inventories fell by 114 Bcf.

The EIA also reported that stockpiles are now 10% below their levels of a year ago and have reached 7.1% above the five-year average.

According to the EIA, U.S. working stocks of natural gas totaled about 2.356 trillion cubic feet, around 156 Bcf above the five-year average of 2.200 Tcf and 261 Bcf below last year’s total for the same period. Working gas in storage totaled 2.617 Tcf for the same period a year ago.

 

Forecast

This week, investors are expected to continue to react to the weather. However, we’re also likely to see more consolidation on the daily chart because of end of the month position-squaring. Traders will also start preparing for the start of spring.

With winter declared over, the focus will begin to shift on forecasts for spring and summer. Even though winter may be over, there is still the potential for lower prices because meteorologists are taking about the possibility of El Nino this summer.

Meteorologists have identified signs of a possible El Nino condition developing in the Pacific. El Nino is a weather pattern created by warmer temperatures in the Pacific. El Nino creates more disturbances in the Pacific, but tends to make for cooler summers on the east coast. This would be another negative for natural gas consumption. Its effect on natural gas prices will be determined by whether the El Nino is moderate or weak.

The short-term weather outlook this week calls for very light natural gas demand early in the week, but this should increase to moderate by the week-end.