Natural gas futures posted a potentially bearish technical closing price reversal top on Monday after slamming into resistance inside an important 50% to 61.8% retracement zone. The catalyst behind the selling pressure was rising production, which offset potentially bullish weather forecasts. Unless the supply and demand conditions change, the chart pattern suggests there is room for further weakness.

At 08:29 GMT, August natural gas futures are trading $2.387, down $0.016 or -0.67%.

Production Concerns Capping Gains

Genscape said production set a new record daily high over the weekend. The analytics firm’s estimates showed Lower 48 production climbing to 90.5 Bcf/d on Saturday (July 6), with that figure staying above the 90 Bcf/d mark every day since Wednesday (July 3). Production over the weekend averaged 1.5 Bcf/d more than the prior 30-day average.

Short-Term Weather Outlook Potentially Bullish

NatGasWeather said on Monday that its midday Global Forecast System data maintained hotter trends into early next week but dropped 4-5 cooling days (CDD) around the middle of July compared to 24 hours earlier.

“However, the data was already exceptionally hot and near the hottest over the past 40 years over this stretch in terms of national CDDs, so giving back a few CDDs was to be expected,” the forecaster said. “…Where the pattern remains hottest is July 13-20 as upper high pressure strengthens out of the southern U.S. and across the central and northern U.S., where highs into the 90s are likely from Minneapolis to Chicago for strong national demand, aided by 90s to 100s across the southern U.S. and Plains.”

Genscape, Inc. said, “Current weather forecasts suggest next week may see the highest cooling load demand for natural gas so far this season. Current Genscape estimates suggest gas demand for power generation this week will average 38.3 Bcf/d, but next week gas demand for power is expected to swell to 41.2 Bcf/d as hotter weather moves in, peaking next Tuesday or Wednesday.”

Daily Forecast

Let’s look at the chart first. The main range is $2.745 to $2.134. Its retracement zone at $2.440 to $2.512 is providing resistance. Buyers are going to have to clear this area in order to trigger an acceleration to the upside.

The new short-term range is $2.134 to $2.467. If the selling continues then look for a potential break into $2.301 to $2.261. Buyers are going to have to step in on a pullback into this area in order to form a secondary higher bottom.

So we have a situation, whereby traders are going to have to decide to buy strength or value.

We also need to see the presence of real buyers in order to generate a longer-term rally. Otherwise, aggressive short-covering could trigger a breakout rally, but gains are likely to be limited unless the real buyers show up.

EBW Analytics Group CEO Andy Weisman said, “With the net short position held by speculative investors at its highest level of the past three years, this shift in the weather forecast is likely to trigger a significant further price increase this week. The magnitude and duration of the increase, though, will depend heavily on whether temperatures moderate again later in the month.”