Natural Gas Price Fundamental Daily Forecast – Short-Squeeze On as Traders React to Lower Oil Prices

Natural gas prices are trading higher early Tuesday, confirming yesterday’s dramatic technical closing price reversal bottom. Contrary to what some analysts think, cold weather had nothing to do with Monday’s rally.

In fact, to get the natural gas market right, sometimes you have to spend a little time thinking outside the box, or connecting the dots. This market is not always about demand especially at the end of the winter heating season, sometimes the price action is driven by production issues. To pin every huge upswing or downswing on the weather is just being lazy.

At 10:01 GMT, May natural gas futures are trading $1.885, up $0.066 or +3.63%.

Crude Oil Plunge the New Bullish Catalyst

Crude oil prices plunged on Monday, posting its biggest daily rout in nearly 30 years after top producers Saudi Arabia and Russia launched a price war.

The steep price drop was fueled by Saudi Arabia’s announcement of plans to boost its crude output above 10 million barrels per day (bpd) in April from 9.7 million bpd in recent months, two sources told Reuters on Sunday. The kingdom also slashed its export prices at the weekend to encourage refiners to buy more.

Russia, one of the world’s top producers alongside Saudi Arabia and the United States, also said it could lift output and that it could cope with low oil prices for six to 10 years.

Impact on U.S. Oil Production

The news is bad for U.S. crude oil producers who are caught in the middle of the price war. Because the breakeven for shale oil is about $50 a barrel, U.S. shale producers had no choice but to deepen spending cuts and could reduce production.

Natural Gas Prices Should Benefit

Natural gas futures rallied on Monday and are higher today because lower U.S. crude oil production is likely to lead to cuts in associated gas output. This will reduce natural gas supply, giving prices a boost.

“We believe a sharp reduction in U.S. shale oil drilling would, all else equal, be positive for natural gas prices,” Goldman Sachs Equity Research analysts led by Brian Singer wrote in a note to clients early Monday. “We estimate if our covered producers invest on the basis of $30-$45/bbl WTI over the next five quarters, we will see more than 1 Bcf/d net less U.S. gas production.”

Keep in mind that natural gas is usually present when oil is discovered or pumped out of the ground. The more oil wells producing, the greater the amount of natural gas captured. If the wells are shut down then this residual natural gas will be left off the market, creating lower supply.

Daily Forecast

The fundamentals changed on Monday to the bullish side because supply could be dampened. This news spooked the massive amount of shorts in the market, encouraging them to cover positions aggressively, and leading to a short-squeeze.

Our work suggests that prices could rise as high as $1.943 to $2.010 over the near-term. Look out to the upside if buyers can overcome $2.060.