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James Hyerczyk
Natural Gas

Just like last Monday, natural gas prices are trading sharply higher on expectations of lower production and increased demand with the economy opening up and as we approach the summer cooling season.

Lower production is likely the primary driver of the rally. One catalyst behind expectations of lower production is the natural gas drilling rig count. The U.S. natural gas rig count held steady to finish the week ending Friday (May 22) at 79 units, while the overall domestic tally continued to grind lower on oil retrenchment, the latest numbers from Baker Hughes Co. (BKR) showed, and Natural Gas Intelligence (NGI) reported.

With U.S. operators sending 21 oil-directed rigs packing, the combined domestic rig count ended the week at 318, down 665 units from its year-ago tally. The U.S. count has now plummeted by 474 rigs since March 13, according to BKR and NGI.

At 13:06 GMT, July natural gas is trading $1.934, up $0.053 or +2.82%.

Short-Term Weather Outlook

According to NatGasWeather for May 26 to June 2, “Hot high pressure will rule California and the Southwest the next several days with record setting highs of 90s and 100s, locally 110s across Southwest deserts. However, this will be effectively countered by the rest of the U.S. experiencing mostly comfortable highs of upper 60s to 80s. This includes Texas, the South, and Southeast where weather systems will stall this week with heavy showers and thunderstorms. A cooler trending late season weather system will sweep across the Northeast late next weekend.”

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US Energy Information Administration Weekly Storage Report

The U.S. Energy Information Administration (EIA) reported that domestic supplies of natural gas rose by 81 billion cubic feet for the week-ended May 15. That figure matched the average increase forecasted by analysts polled by S&P Global Platts.

Total stocks now stand at 2.503 trillion cubic feet, up 779 billion cubic feet from a year ago, and 407 billion cubic feet above the five-year average, the government said.

Daily Forecast

With the weather patterns offsetting each other for the time being, the focus for traders has shifted once again to production. Although I haven’t seen the numbers, the price action suggests there were bullish production numbers over the weekend. This story is likely to underpin the market throughout the session.

Like previous rallies, we’re still looking for the major players to step in and stop the move because of the huge supply. Only a change in the forecast to hot will lead to an extended rally. In the meantime, the production cuts are likely to have a more bullish effect on the deferred contracts covering next winter.

For a look at all of today’s economic events, check out our economic calendar.
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