Natural Gas News: Overbought Conditions, Technical Reversal Capping Gains

Natural Gas Futures Decline: Bearish Signals Emerge

Technical Adjustment:
Natural gas futures took a downward turn, influenced by signs of a potential bearish trend, notably highlighted by a closing price reversal top last Friday. This movement is largely seen as a technical correction, likely triggered by overbought market conditions.

At 12:40 GMT, Natural Gas is trading $2.243, down $0.009 or -0.40%.

Weather Impact:
The start-of-the-week shift in natural gas prices often correlates with changes in the weekend weather forecast. Today’s price action suggests a possible move towards milder temperatures, typically associated with decreased demand for natural gas.

Bullish Momentum Driven by Supply Constraints and Demand Trends

Despite Friday’s lower close, natural gas futures ended the week on a strong note, propelled by diminishing production levels and robust demand from liquefied natural gas (LNG) exports. This momentum marks the second consecutive week of gains, a feat unseen since early March.

Supply Constraints:
The dwindling domestic production, exemplified by companies like EQT and Chesapeake Energy deferring well completions and curbing drilling operations, has led to a notable 9% decline in production in 2024 so far. The resurgence of the Freeport LNG plant in Texas has further strained supply, augmenting gas flows to LNG export facilities.

Storage and Production Analysis

Despite bullish underpinnings, the market faces a significant oversupply in storage, currently hovering approximately 31% above the seasonal norm. The Energy Information Administration (EIA) data indicates a storage build of 79 billion cubic feet (Bcf), slightly below the anticipated 87 Bcf, offering some price support. However, elevated storage levels remain a looming concern, potentially hindering further price hikes.

Drilling Activity Insights:
Recent trends in drilling activity provide insights into future production dynamics. The Baker Hughes report reveals a decline in active drilling rigs, with natural gas rigs witnessing a marginal uptick to 103 amidst an overall downtrend. This reduction in rigs mirrors the industry’s cautious stance amid price and demand fluctuations.

Short-Term Market Forecast

The short-term outlook for the market remains positive, buoyed by decreased production, robust LNG export demand, and strategic supply management by major producers. However, substantial gas storage volumes pose a risk of price suppression unless offset by sustained demand or further production cuts. Traders are advised to closely monitor weather patterns and LNG export levels, crucial factors shaping market trends in the coming weeks.

Technical Analysis

Natural gas futures are trading slightly lower on Monday after confirming Friday’s potentially bearish closing price reversal top. The chart pattern does not mean the trend has changed. Usually it forms as traders try to alleviate overbought conditions.

Although natural gas futures could face further selling pressure, we could see buyers return on a test of the 50-day moving average at $2.171. This indicator is controlling the intermediate trend.

If this support fails then look for the selling to possibly extend into $2.126. A move through $2.344 will negate the closing price reversal top and signal a resumption of the rally.