Natural Gas Price Fundamental Daily Forecast – EIA Report Catches Short-Sellers by Surprise

Natural gas futures jumped over 4 percent on Thursday after a government report showed a smaller-than-expected inventory increase. The rally caught the mostly short market by surprise, causing short-sellers to scramble to get out of their positions.

August Natural gas futures settled the session at $3.078, up $0.125 or +4.23%.

According to the U.S. Energy Information Administration (EIA), U.S. natural gas stocks increased by 78 billion cubic feet for the week-ending June 9. Analysts were expecting a storage injection of 89 billion cubic feet.

Additionally, the five-year average for the week is an injection of 87 billion cubic feet, and last year’s storage injection for the week totaled 68 billion cubic feet. Last week’s report showed natural gas inventories rose by 106 billion cubic feet in the week-ending June 2.

The EIA also reported that U.S. working stocks of natural gas totaled about 2.709 trillion cubic feet, around 228 billion cubic feet above the five-year average of 2.481 trillion cubic feet and 322 billion cubic feet below last year’s total for the same period. Working gas in storage totaled 3.031 trillion cubic feet for the same period a year ago.

Forecast

The large number of shorts in the market that we had reported a couple of time this week suggests that Thursday’s rally was driven by short-covering. I don’t think that shorts flipped the switch to long this quickly based on the EIA report. We’ll be watching Friday’s action to see if the short-covering continues. We’ll also be curious to see how this particular move affected the Commodity Futures Trading Commission report.

Typically, in a weak market, the first leg up from a bottom is all short-covering. The next break, or test of the recent bottom is the one to watch. If it attracts buyers then a support base will form or the rally will continue. I’m not confident that buyers will just suddenly appear at $3.080 on Friday when they could’ve bought all they wanted near $2.930 on Wednesday.

Usually investors will buy strength when they have strong fundamentals and momentum on their side. It also takes a lot of buying power to drive out stubborn shorts. So not only will we be watching the price action, but also the order flow.

Fundamentally, demand for next week is expected to be moderate largely due to expected higher temperatures in the eastern half of the United States into the weekend. Cooler temperatures are expected across the northern and east central regions beginning early in the week.

If new longs are coming into the market then they are going to have to prove their commitment by driving out short-sellers holding buy stops over $3.127. If they can succeed at this and are willing to continue to buy strength then we could see an eventual rally into $3.233 to $3.303.

The key to a sustainable rally will be the bullish traders’ ability to drive out the shorts with enough conviction to convince momentum traders to shift their bias to the upside. If they are unable to do this then look for a pullback towards this week’s low at $2.936.