Natural Gas Price Fundamental Daily Forecast – Speculative Buyers Betting on Increased Heat Demand

Natural gas futures are trading higher on Friday, following through to the upside after yesterday’s strong technical closing price reversal bottom. The price action indicates that yesterday’s government storage report was fully-priced into the market and that speculators may be betting on warming temperatures to increase demand for natural gas. Gains are likely being limited because of weakness in the spot market.

At 11:55 GMT, July natural gas futures are trading $2.687, up $0.013 or +0.49%.

Traders may be responding to a report from Bespoke Weather Services that told clients that “balances would see improvement as more heat arrives, at which point some upside risk into $2.65-$2.70 still very much remains in play.”

“The strongest heat comes late next week into next weekend, at which time we see the chance for numerous record highs in the Southeast,” the forecaster said. “Some spots have a good chance to see a couple of days with highs near 100 degrees, which is very intense for any pattern in late May. Low 90s can be seen up into the Mid-Atlantic as well on the hottest days.”

“Models suggest the hotter temperatures won’t be ‘unending’ like the pattern observed last year, with recent data ‘showing the heat relax as we head toward early June,” according to Bespoke.

U.S. Energy Information Administration Weekly Storage Report

The EIA reported on Thursday a 106 Bcf injection for the week-ending May 10 into U.S. natural gas storage. This was on-target with pre-report estimates. Last year, the EIA reported a 104 Bcf build and the five-year average is 89 Bcf. Traders viewed the report as neutral.

“Balance-wise, this is tighter than last week’s 85 Bcf build,” Bespoke said, estimating that recent balances would put the market on track to end the injection season with 4.0 Tcf in the ground. Still, “weather adjusting can be more difficult in these low demand times of the year. While 4.0 Tcf is probably unrealistic, it shows that we still need to see material improvement in balances to avoid a large storage total heading into winter.”

Short-Term Weather Outlook

According to NatGasWeather for May 17-May 23, “The Great Lakes, Ohio Valley, and Northeast will be mostly comfortable with highs of 60s to lower 80s for light demand. However, temperatures will be very warm to hot from Texas to the Mid-Atlantic Coast as high pressure strengthens to produce highs of upper 80s to lower 90s. The West and Plains will see numerous weather systems track through with heavy showers and thunderstorms but with mixed results as the SW cools into the comfortable 70s and 80s but a bit chilly across the NW w/50s and 60s. The South and Southeast will be hotter late next week with highs of 90s for strong cooling demand. Overall, demand will be moderate to low.”

Daily Forecast

Traders are shrugging off the EIA data because it represents “stale news”. Instead they are already looking forward. The price action suggests investors are betting on the return of hotter temperatures, which is highly unusual for May.

Technical traders are also getting involved as evidenced by another possible higher-bottom at $2.621. A trade through $2.700 will reaffirm the uptrend on the daily chart. Taking out this top could trigger a rally into the Fibonacci level at $2.713.

The Fib level at $2.713 is the trigger point for an acceleration to the upside with $2.762 the next major upside target.

If upcoming heat is confirmed later in the session then look for a breakout to the upside. A failure to sustain a rally over $2.700 or a break back under $2.679 will indicate the presence of sellers. And perhaps temperatures will not get as hot as previously expected.