Natural Gas Price Fundamental Daily Forecast – Needs to Stay Under $2.799 to Sustain Downside Bias

Natural gas futures are slightly lower early Monday. The market is trading inside Friday’s range, which suggests investor indecision and impending volatility. Nat gas finished the week sharply lower, but produced a potentially bullish closing price reversal on the daily chart. This suggests the buying may be greater than the selling at current price levels. It does not mean the trend is getting ready to turn up. But it could mean we’re setting up for a short-covering rally designed to alleviate some of the oversold pressure.

At 1052 GMT, October Natural Gas is trading $2.769, down $0.007 or -0.25%.

The price action is expected to be driven by the notion that despite the supply deficit, cooler temperatures and rising production will help tighten the storage deficit before the winter season begins in November.

The market is also trading on the weak side of several technical retracement zones. This is creating the downside momentum that could lead to a challenge of a series of former bottoms at $2.751, $2.703 and $2.688.

Weekly Storage Report

According to the U.S. Energy Information Administration, U.S. natural gas in storage increased by 63 Bcf to 2.568 Tcf for the week-ended August 31. The build was slightly more than the consensus calling for a 60-Bcf addition.

The injection was also more than the 60-Bcf build reported during the corresponding week in 2017 but less than the five-year average addition of 65 Bcf, according to EIA data.

As a result, stocks were 643 Bcf, or 20%, less than the year-ago level of 3.211 Tcf, and 590 Bcf, or 19%, less than the five-year average of 3.158 Tcf.

Weather

According to NatGasWeather.com for September 10 to September 16:  “A weather system with showers and thunderstorms will track across the Ohio Valley and Northeast Monday, but then warming the rest of the week. The South will see a slow moving weak weather system produce showers, while a cooler system will impact the Northwest. Temperatures remain hot over the Southwest and Southeast with upper 80s to 90s, 100s over SW deserts. As the week progresses, warm high pressure will strengthen over most of the country with 80s to near 90F becoming widespread besides the Northwest. Hurricane Florence is likely to impact the Carolina Coast late in the week with heavy rain and dangerous winds. Overall, national demand will be moderate.

Forecast

Prices are likely to remain under pressure until all the long speculators have been driven out of the market. At that point, we’re likely to see a short-covering rally.

I don’t expect to see aggressive shorting on weakness because there still is a supply deficit. However, it’s also too early to start betting on a rally. Therefore, we’re likely to see a sideways to lower trade over the near-term unless hot weather return unexpectedly. Hurricanes in the Gulf of Mexico could play a role if they target natural gas platforms and facilities. But as we saw last week in the crude oil market, any spike higher in prices could end quickly once the situation is assessed.

According to Platts Analytics, even with slightly better builds over the next two weeks, they will still be below the five-year average and will further widen the deficit.

Platts is also saying it expects “storage to peak at approximately 3.3 Tcf before the switch to withdrawals in early November. If so, it would be the lowest level to start the heating season since 2005, when stocks peaked at 3.2 Tcf. A colder-than-normal winter could push up prices due to the low inventory despite production gains.”

Time is the biggest factor driving prices. There is no doubt we’re going to start the winter heating season with a deficit. However, the timing isn’t right yet for any aggressive buying. Furthermore, if you want to play a winter rally, you have to move out to the December to March futures contracts.

The key area to watch on the upside is the retracement zone at $2.799 to $2.833. Look for a downside bias as long as the market remains under $2.799. Neutral between $2.799 and $2.833. We could see the market strengthen on a sustained move over $2.833. This will be short-covering and it should be met with fresh shorting pressure.