Natural Gas Price Fundamental Daily Forecast – Could Start to Weaken on Pick-up in U.S. Production

Natural gas spiked higher on Tuesday, putting it in a position to challenge last week’s high. Short-covering and position-squaring ahead of the May futures contract’s expiration on Thursday may have helped generate some of the volatility.

Although June is the most active futures contract, May natural gas futures is the front-month contract. It surged to its highest price since the April contract expiry on March 27. The price action indicates tightness in the cash market caused by the rare drawdowns in storage during the month of April.

June Natural Gas finished Tuesday’s session at $2.813, up $0.038 or +1.37%.

The supply and demand picture continues to be clouded, leading to the erratic price action.

According to Platts Analytics, U.S. production fell 2 Bcf/d Tuesday, dropping 76.7 Bcf/d from 78.7 Bcf/d on Monday. Dry production had not had this large a day-on-day change since January 1 when production levels fell from 75.6 Bcf/d to 72.2 Bcf/d.

In addition, production levels have fallen to the lowest point since February 20 when they stood at 76.6 Bcf/d.

In a sign that cold temperatures are still lingering, U.S. demand saw a small bump in national levels Tuesday, rising to an estimated 67 Bcf/d, up 1.1 Bcf/d from the 65.9 Bcf/d averaged over the previous three days, according to S&P Global Platts Analytics.

So far over April U.S. demand has averaged 75.4 Bcf/d, a notable 11.1 Bcf/d above the 64.3 Bcf/d averaged April 1-24, 2017.

However, the elevated demand seen so far over April is not expected to stick around as U.S. demand is estimated at an average of 64.9 Bcf/d and 63.2 Bcf/d over the next seven and eight-to-14 day periods respectively, Platts Analytics demand data showed.

Forecast

I think that this week’s price action is being driven by the expiration of the May futures contract. Once this is out of the way on Thursday, I expect the sellers to retake control.

Production levels are expected to return to the elevated levels seen in early April, as over the next 14 days dry production is estimated to average 78 Bcf/d, just under the 78.1 Bcf/d averaged so far over April.

Additionally, after a slight cooling over the week-end, temperatures are expected to warm up next week. This should drive demand back to normal to below normal levels.

Finally, this week’s U.S. Energy Information Administration’s storage report is expected to show an 11 Bcf drawdown.