Natural Gas News: Can Heat Break Storage Resistance and Trap Natural Gas Shorts?

Natural Gas Bounces Inside the Range but Storage Keeps Sellers in Charge

September natural gas futures are higher Friday but the market has not been able to hold anything above $2.80 all week. Hot weather and short-covering brought buyers back after the recent break. Thursday’s EIA report stopped them with a 36 Bcf build that was bigger than expected and wider than the five-year average. The contract is sitting inside yesterday’s range and the 50-day moving average at $2.975 is still a long way overhead.

September natural gas futures are trading $2.773, up $0.046 or 1.69% at 16:51 GMT.

Daily September Natural Gas Technical Analysis

September natural gas futures are slightly better at mid-session on Friday, trading inside yesterday’s range. This tends to indicate investor indecision and impending volatility.

A break below the short-term 50% level at $2.723 could expose Thursday’s low at $2.709 and trigger increased downside volatility.

On the upside, traders will face some headwinds at a 50% level at $2.798, a swing top at $2.830 and a Fibonacci level at $2.840. Clearly, buyers have to take out $2.840 with conviction to fuel an upside breakout. If successful, there is room to run into the 50-day moving average at $2.975.

Storage Built Faster Than the Heat Could Burn

The EIA reported inventories rose 36 Bcf in the week ended August 7 against expectations of 30 to 31 Bcf. The five-year average build for the week is 33 Bcf. Storage now stands at 3,153 Bcf, running 198 Bcf or 6.7% above the seasonal norm. The surplus widened from 195 Bcf the prior week. Summer heat was doing its job. U.S. electricity output rose 7.0% from a year earlier to 99,864 GWh in the week ended August 8. Temperatures across the southern two-thirds of the country are in the 90s to 110s and forecasts call for above-normal heat through August 22 in the South and Southeast.

None of that was enough. Storage built faster than expected anyway and strong wind generation cut into gas burn during the periods of highest power demand. That is why every rally toward $2.80 this week met sellers. The heat is real. The storage data says it is not enough to tighten the balance while production is running this high.

The EIA expects storage to reach 3,985 Bcf by end of October. That would be the highest pre-winter level in 10 years and 5% above the five-year average. The calendar is also turning. Late August can still produce demand spikes but cooling load fades before winter heating arrives. Buyers need a smaller-than-expected build next week. Without one, the heat trade keeps failing at the top of the range.

Production, Feedgas and the Short Position

Lower-48 production hit 113.5 Bcf per day Thursday, up 4.4% from a year ago. Demand was 83.1 Bcf per day, down 0.5%. LNG feedgas came in at 17.9 Bcf per day, down 1.8% from the prior week. More gas is staying in the domestic system while export facilities work through maintenance. The EIA cut its third-quarter Henry Hub price forecast to $2.87 citing robust output and lower feedgas demand.

Energy Transfer’s Hugh Brinson pipeline reaches full capacity at 1.5 Bcf per day on September 1. More Permian gas heading to Henry Hub in the month when cooling demand starts rolling off and before winter heating picks up.

European storage at 59% as of August 9 is below the five-year average of 76%. That can support future U.S. LNG demand once maintenance ends but it is not pulling enough gas out of the domestic system right now.

The short position is the other side of this market. Non-commercial traders held a net short near 197,546 contracts as of August 4. Managed money was net short roughly 126,500 contracts with gross shorts near 355,600. That is one of the most bearish positioning setups in years and it is why every hot forecast produces a sharp bounce. When prices start moving higher, shorts have to buy contracts back and the move gathers speed. This week’s rally toward $2.80 had that look. The fact that it stalled at the top of the range tells you sellers have not been forced out of the trade yet. The next COT report shows whether the rally reduced the short position or whether it is still loaded.

What to Watch

The market is caught between a short-covering risk and a supply problem. The short position can move prices fast on the next hot revision. The supply side has been winning every time the rally runs into the data. Thursday’s 36 Bcf build landed on top of production above 113 Bcf per day, lower feedgas and more Permian capacity arriving next month. Buyers need the next EIA number to come in tight or the weather trade keeps failing at the top of the range.

The contract is trading inside yesterday’s range with resistance stacked above at the swing top and the Fibonacci level near $2.84. Taking that out with conviction opens room to the 50-day moving average. A break below the 50% level at $2.723 exposes Thursday’s low and the downside opens up again. The trend favors sellers until the storage data starts telling a different story.

More Information in our Economic Calendar.