Natural Gas News: Heat Forecast Lifts Market Despite Bearish Storage Report

Traders Sold the Storage Miss and Bought It Right Back

August natural gas futures are trading around $3.298 Thursday afternoon, up about 1.13%. July futures are near $3.290, up roughly 2.14%. The EIA storage report hit at 10:30 and the initial reaction was to sell. The build came in at 76 Bcf against expectations of 67 to 72 Bcf and the selling was immediate. It lasted about as long as it took traders to pull up the weather forecast for next week. By midday the market had reversed the entire move and was trading higher on the session.

A 76 Bcf miss does not hold when Sunday’s heat forecast looks like this one does.

Daily August Natural Gas Futures

August natural gas futures are higher Thursday afternoon but the trade has been volatile. The buyers are still having trouble taking out swing chart resistance at $3.377 and $3.418 with the market primarily being capped by the intermediate 50% level at $3.465.

On the downside, holding above the 50-day moving average at $3.177 for seven straight days has clearly established this indicator as support.

Clearly, the tone is bullish but without a clear bullish catalyst, it will be hard to find a reason to breakout to the upside with storage levels still elevated. If the 50-day MA fails then look for a retest of the three bottoms at $3.059, $3.001 and $2.974. I think traders will be reluctant to short weakness near $3.000 in late June or early July with nearly the whole summer ahead.

The Build Was Bearish for About Twenty Minutes

The EIA reported a 76 Bcf injection for the week ending June 19, bringing total working gas to 2,835 Bcf. That is 152 Bcf above the five-year average and 49 Bcf below last year. The consensus was looking for 67 to 72 Bcf with the five-year average sitting near 75 Bcf. On paper the number was bearish. The build exceeded expectations and came in above the five-year average for this time of year.

The market sold it and then changed its mind fast. The year-over-year deficit at 49 Bcf below last year’s level is the number that matters more than the weekly overshoot. A year ago this market was oversupplied and the current comparison keeps tightening. The surplus above the five-year average is 152 Bcf and that sounds like a cushion until you consider what the next two weeks of weather demand could do to injection pace.

Sunday Changes the Demand Picture

Weather demand is moderate through Saturday with cooler systems moving across the Midwest, Ohio Valley and Northeast bringing highs in the upper 60s to 80s. That is not the setup that drives gas prices higher. Sunday is.

By Sunday the eastern two-thirds of the country turns hot with highs reaching the 80s to 100s. The western and southern United States are already running warm to hot with interior California, the Southwest and Texas seeing highs in the 90s to 100s. When that kind of heat settles across the major population centers, air conditioning load pushes power burn well above seasonal norms.

The market reversed Thursday’s EIA selloff because traders are already looking past Saturday’s moderate demand into next week’s heat. A 76 Bcf build matters less when the following week’s injection could come in well below average on elevated cooling demand. That is the trade the market is making right now and the midday reversal confirmed it.

LNG Exports and Production Are Tilting the Balance

LNG exports continue to pull gas out of the domestic market. Rising feedgas flows to export terminals remove supply from the system regardless of what weather demand does. On top of that, domestic production has been slightly lower in recent weeks. When exports are climbing and production is easing at the same time, the surplus erodes faster than the weekly storage headline suggests.

The 152 Bcf above the five-year average is shrinking. Two months ago the bears were pointing to that surplus as the reason this market could not rally. The year-over-year comparison has already flipped to a deficit. If LNG flows stay strong and the heat forecasts verify through early July, the five-year surplus starts closing fast.

Seven Days Above the 50-Day and the Base Keeps Building

The 50-day moving average has held as support for seven consecutive sessions now. That is not a market that is trying to break down. Sellers have had the storage data on their side for weeks and they still cannot push this market below the 50-day. The progression of higher lows from April and May is intact underneath the current price.

The resistance overhead at $3.377 and $3.418 has been capping rallies but the buyers keep coming back. The market needs a catalyst to break through and sustained heat starting Sunday could be it. Sellers are not going to chase shorts near $3.00 in late June with the entire summer demand season ahead of them. The risk-reward on the short side is getting worse by the week while the long side has weather, tightening storage comparisons and rising LNG demand working in its favor.

What to Watch

Sunday’s heat forecast is the near-term catalyst. If the hot pattern verifies across the eastern two-thirds of the country and persists into early July, next week’s storage injection could come in well below the five-year average and the year-over-year deficit widens further. That is the sequence that breaks through the resistance the market has been sitting under all week.

August natural gas has held the 50-day for seven straight sessions and the buyers keep defending every dip. The overhead resistance is the last thing standing between this base-building phase and a real breakout. A sustained heat wave starting Sunday with LNG exports still climbing and production easing is the combination that gives the bulls the catalyst the technical setup has been waiting for.

More Information in our Economic Calendar.