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James Hyerczyk
Natural Gas

Natural gas futures are trading higher shortly after the regular session opening on Wednesday. Earlier in the session, the market spiked to its highest level since May 8 on the back of a bullish weather outlook and reports showing increased LNG demand. Don’t be surprised if the bulls take a breather today as they prepare for Thursday’s government weekly storage report.

At 12:40 GMT, September natural gas futures are trading $2.208, up $0.015 or +0.68%.

Short-Term Weather Outlook

According to NatGasWeather for August 5 to August 11, “An unseasonably cool air mass continues to bring comfortable highs of 70s to lower 80s to the east-central U.S., Midwest and Ohio Valley for light national demand. Regionally hot conditions continue across the West and southern U.S. with highs of 90s to 100s. Very warm conditions will push into the central and northern U.S. this weekend with highs of upper 80s to lower 90s from Chicago to New York City, while hot most elsewhere besides the Northwest, increasing national demand to high levels.”

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Natural Gas Prices Reach “Turning Point” – BofA Analysts

Bank of America said prices are now at a “turning point,” with summer heat in the U.S. slowing natural gas storage gains and “the balance tightening rapidly heading into winter as demand recovers to full capacity and U.S. natural gas production remains flat.

BofA analysts including Peter Helles see European and Asian demand for U.S. liquefied natural gas (LNG), depressed for months by the shocks of the pandemic, recovering this year and ramping up in 2021.

“We expect injections to slow in the coming months to avoid end of season congestion – barring a very mild rest of summer – and thus do not see much further downside to front month prices from here,” the BofA analysts said.

Additionally, the analysts said, “LNG demand will ramp up starting September and rise strongly into the winter as Europe and Asia free up storage capacity.” At this time, U.S. storage inventories are forecast to reach 3.92 trillion cubic feet (Tcf) by the end of October, well below the 4.05 Bcf record set in 2016.

BofA analysts also noted that associated gas production remains low relative to pre-pandemic levels as producers slowly shut-in oil wells back online.

Heading into the winter, we then see the balance tightening rapidly as LNG demand recovers to full capacity and U.S. gas production remains flat,” the analysts said.

Furthermore, the BofA analysts look for balance tightening to accelerate in 2021, with production returning more slowly than global industrial demand.

“We do see some upside risk to 2021 summer prices as U.S. prices may have to rise further to ration demand for LNG and power generation, or to stimulate dry gas production,” analysts said.

Finally, BofA analysts concluded that all of this is possible if the coronavirus can be contained and the economy can regain its footing before a worse-than-predicted recession hits the economy. There is downside risk “from the recession turning out to be worse than what we currently project.”

Short-Term Outlook

Bullish as long as traders can hold the September natural gas futures contract above the $2.149 daily chart Fibonacci level. Falling below this level but staying above the 50% level at $2.041 will create a neutral situation. Prices could weaken into a value area under $2.041.

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