Natural Gas News: Natural Gas Futures Near Breakout as Surplus Shrinks

July Natural Gas Holds Above $3.30 but the Test Is This Week

July Nymex Natural Gas rolled into the front month at $3.04 and immediately pushed above $3.30. The June contract expired and the July contract brought volatility with it. Storage injections came in light, western heat forecasts firmed up, and the Creole Trail pipeline maintenance is about to pull 0.8 billion cubic feet per day out of Sabine Pass feedgas. Three drivers all hitting at once. The question is whether they hold together or cancel each other out.

Storage Surplus Is Shrinking

The cushion is almost gone. The surplus over year-ago levels has narrowed to just 21 billion cubic feet and the five-year average gap has compressed to 144 billion cubic feet. That did not happen overnight. The Energy Information Administration printed a 92 billion cubic feet injection for the week ending May 22 and the Street was expecting 95 to 96 billion cubic feet. Total working gas sits at 2,483 billion cubic feet but the direction of the surplus matters more than the total number right now.

The next Energy Information Administration report drops June 4. Another light injection and the bears lose their last argument. Traders who have been selling rallies because storage was comfortable are watching that comfort disappear week by week.

Western Heat Has to Carry This

The country is split and that is the problem. Above-average temperatures across the western half could drag air conditioning demand into early June. More cooling load means more gas burned at the power plant. That part of the forecast is doing the work for the bulls.

The Midwest and East are running cooler than normal. That is where the biggest population centers sit. National cooling demand is not going to spike when half the country does not need to turn the air conditioning on. July Nymex Natural Gas needs the western heat to hold $3.20 to $3.30 by itself and one region carrying the whole country is a thin trade.

Sabine Pass Goes Offline

Creole Trail pipeline maintenance between May 31 and June 1 pulls roughly 0.8 billion cubic feet per day out of Sabine Pass LNG deliveries. That volume does not leave the market. It redirects into domestic supply and somebody has to take the other side.

Feedgas demand has been averaging 18.6 billion cubic feet per day with global LNG prices high enough to keep exporters running full. Corpus Christi growth has added to those flows. None of that changes the fact that Sabine Pass gas is coming back onshore for a few days. If July Nymex Natural Gas absorbs that extra supply without cracking $3.20, the demand underneath this market is stronger than the headline storage numbers suggest.

125 Rigs and Falling

The rig count tells one story. The production data tells another. Active natural gas drilling rigs have dropped to 125 and dry gas output across the Lower 48 has pulled back to a range of 107 to 109.4 billion cubic feet per day from 109.8 billion cubic feet per day in April. Permian Basin local pricing is weak enough that some producers are voluntarily holding back. That restraint is real and it is keeping a floor under prices.

The problem is what is underneath the floor. High crude oil prices keep oil-directed rigs running and every barrel drilled in the Permian produces associated gas along with it. Haynesville output keeps expanding. Pipeline bottlenecks are the only thing holding some of that supply back and bottlenecks get fixed. The bulls are borrowing time from production restraint that was never designed to last.

Weekly July Natural Gas Futures Technical Analysis

July natural gas futures posted one of its biggest weekly trading ranges in two months last week, reaching its highest level since the week-ending March 27. The main trend is down according to the weekly swing chart, but the minor trend is up, leading to a shift in momentum.

The main trend will change to up on a trade through $3.881, which means we’re still in sell the rally mode. A move through $2.893 will reaffirm the downtrend.

Swing chart support is the pivot at $3.141. Swing chart resistance is the pivot that stopped the rally last week at $3.387. The best resistance area is the price cluster formed by the longer-term pivot at $3.651 and the 52-week moving average at $3.734.

The strong weekly close and cooperative weather pattern makes $3.387 the key level to watch this week. Overtaking this level will reaffirm the rally. If it creates enough upside momentum, we could see an acceleration into $3.651 to $3.734, where sellers will likely be waiting.

If there is no follow-through rally then we could see a pullback into the short-term pivot at $3.141. Aggressive buyers could come back in on a test of this level as they attempt to form another higher bottom. If it fails, the market is likely to continue to consolidate as traders await the next bullish catalyst which could be the weekly EIA storage report or hot weather.

Weekly Outlook

Three forces are pulling in the same direction and one is pushing back. The storage surplus is compressing, producers are holding rigs at 125, and the western heat forecast is dragging cooling demand into early June. That is a bullish setup. The eastern cool-down and Sabine Pass maintenance are the counterweights but neither one is permanent. The Energy Information Administration report on June 4 is the next gate. A light injection while the heat holds and the bulls have confirmation. A production rebound toward 110 billion cubic feet per day or a national demand miss and sellers get their opening.

$3.387 stopped the rally last week. That price is the whole trade going into June. Buyers who got long above $3.30 need to see that level break or they are sitting on dead money. Above it the resistance cluster at $3.651 to the 52-week moving average at $3.734 is where real selling shows up. Below $3.387 the pullback targets $3.141 and the bulls need that level to hold to keep the higher bottom pattern alive.

More Information in our Economic Calendar.