Natural Gas Fundamental Forecast – February 22, 2017

Natural gas futures plunged sharply lower on Tuesday as meteorologists declared the end of winter. The steep price break was likely triggered by aggressive shorting and the liquidation of the last of the long positions held by speculators.

April Natural Gas futures closed at $2.691, down $0.189 or -6.56%.

The end of winter also showed up on the daily chart with the April contract taking out main bottoms at $2.727 from November 9 and $2.693 from May 19 to reach its lowest level since April 18, 2016.

The combination of strong supply and warm weather has now driven the market down about 35 percent below the winter peak. The chart pattern and the fundamentals suggest that further downside action is likely. Fundamentally, gas in storage is running above the five-year average.

Forecast

Short-covering due to technically oversold conditions is always as possibility as well as end of the month position-squaring, however, these rallies are likely to create selling opportunities.

Weather may also play a role in a short-term blip on the charts since the forecasts are calling for the return of cold temperatures in the East this weekend. However, the overall outlook for the East and the Midwest is for above average temperatures.

Longer-term traders are already thinking about the possibility of an El Nino condition later in the year. However, it is way too early to start to establish positions especially since the chart suggests there is room to the downside. Furthermore, although El Nino conditions have been detected, there is no way to know right now if it will be moderate, or lead to cooler temperatures across the Midwest and East this summer. This would certainly hurt demand later in the year.

Looking ahead to Thursday’s U.S. Energy Information Administration’s weekly inventories report, the new data for the week-ending February 17 is expected to show a draw of about 93 Billion cubic feet.

Last week, the EIA report showed at withdrawal of 114 Bcf, 117 Bcf a year earlier and a five-year average drop of 158 Bcf.

The EIA also said that total natural gas in storage currently stands at 2.445 trillion cubic feet. This is about 12.4% lower than levels at this time last year and 3.5% above the five-year average for this time of year.