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James Hyerczyk

Natural gas futures are trading slightly lower on Wednesday after another attempt to breakout to the upside failed to draw enough buyers to continue the four day rally. The price action suggests position-squaring ahead of Thursday’s U.S. Energy Information (EIA) weekly storage report and major production decision by OPEC and its allies.

At 14:00 GMT, May natural gas futures are trading $1.844, down $0.008 or -0.43%.

Helping to underpin the market this week and drive prices higher is the 15-day forecast that calls for the return of cold temperatures, and noted production cuts.

Production Concerns Move to Forefront

Overtaking the call for colder temperatures over the next two weeks are signs of a pullback in production.

EBW Analytics Group analysts said an increase in weather-driven demand expectations has played a part in the recent rally, which included a 12.1 percent gain for the May contract in Tuesday’s session. But the market is also reacting to the prospect of production declines.

“Mounting evidence that oil storage could be completely full in less than a month drove prices much higher than would otherwise have been expected,” the EBW analysts said in a note to clients on Wednesday. “Our model indicates that once tanks top out, production of associated gas could fall by as much as 3.5-5.5 Bcf/d in 90 days.”

“Decline in supply is only half of the equation; demand is declining more rapidly. For now, though, the market is likely to continue focusing primarily on supply. The May contract is likely to probe higher again today. Profit-taking ahead of tomorrow’s weekly storage report, though, may limit today’s gains.”

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Bespoke Weather Services Near-Term Outlook

The European and American datasets “did agree on a minor warmer change early next week …and we adjusted our forecast accordingly, being a shorter range call, while leaving the rest of the forecast most unchanged,” Bespoke said. “…We are still confident in a strong cold outbreak for mid-April on the way, especially” for days six through 10 of the outlook.”

Short-Term Weather Outlook

According to NatGasWeather for April 8 -14, “Mild to warm conditions will again cover the northern U.S. today with highs of 50s and 70s for light demand. Very warm conditions continue across the southern U.S. with highs of 70s and 80s. A weather system is slowly tracking through California and into the Southwest with rain and snow, but with only modest cooling. The first in the series of stronger cold shots will sweep across the Midwest and Northeast Thursday through Saturday with lows of 20s and 30s, followed by more impressive systems next week with lows of 0s to 20s. Overall, low demand today then increasing to high in the coming week.

Daily Forecast

The main trend is up, but the market ran into resistance at $1.875 to $1.959. Buyers will have to overcome this zone in order to signal a resumption of the rally.

If the early selling pressure persists then look for a break back into a support zone at $1.719 to $1.673.

Fundamentally, a tweak toward warmer is putting some pressure on prices, but not enough to kill the uptrend. The current weather forecast calling for cold is still enough to provide support.

Lower production is also providing support, while demand destruction due to the coronavirus could put a cap on the rally, but this would depend on how long the impact of the virus is expected to last.

Once the number of new cases starts to flatten or tops out, traders will be able to predict with some accuracy how long normal demand will be impacted.

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