Natural Gas Price Fundamental Daily Forecast – Production Surge Continues to Weigh on Prices

Natural gas futures are trading slightly higher early Wednesday in what is believed to be a small technical adjustment to a market in the midst of steep decline. The early price action suggests we may see some short-covering and profit-taking throughout the day as traders begin adjusting positions ahead of Thursday’s weekly storage report. However, we’re not likely to see a change in trend to up and hedgers are likely to take advantage of any rally by increasing their bets on lower prices.

At 0928 GMT, August Natural Gas futures are trading $2.795, up 0.007 or +0.25%.

Prices continue to be pressured by rising production which is offsetting the lingering demand from the summer heat and the on-going supply deficit. Reports show that natural gas production in the Lower 48 states jumped 1.5 Bcf/d during the final three weeks in June. This is the best explanation for the rapid sell-off despite the large storage deficit.

According to RBN Energy LLC analyst Sheetal Nasta, “It’s no surprise that Lower 48 production has been on a tear lately” given capacity expansions in the Northeast and high rig counts. “What has taken the market by surprise, however, is the abruptness and sheer strength with which production has surged in just the past couple of weeks.”

“It wasn’t until the second half of June that output shifted into high gear,” Nasta said. “If we compare average volumes in the week-ended June 7, versus the week-ended June 28, we see that total Lower 48 dry gas production zoomed higher by about 1.5 Bcf/d in that time to 81.8 Bcf/d by June 30, with the bulk of those gains occurring in the last week of the month.”

“The production gains have continued into July,” with recent data showing volumes hitting a new high at 82.2 Bcf/d over the weekend. “That’s a whopping 10 Bcf/d higher than this time last year. It’s no wonder that Henry Hub futures, which touched the $3/MMBtu mark in late June, have whimpered back 15 cents or so since then.”

Forecast

Essentially, the natural gas market shifted from a weather-driven market to a production-driven market. This turned the tide on the bulls, forcing them to give up hope for $4/MMBtu prices in mid-June even while forecasts still called for an extended heat dome over most of the United States into mid-July.

At current production levels and with temperatures expected to drop back to more normal levels, traders are now increasing short-side bets that the current supply deficit will be shored up before the start of winter.

At this time, our primary downside target remains the May bottom at $2.727. We may see periodic short-covering rallies due to technically oversold conditions. However, we expect $2.848 to act as solid resistance.