Natural Gas Price Fundamental Daily Forecast – Testing Short-Term Retracement Zone: Strengthens Over $2.712, Weakens Under $2.702

Natural gas futures are trading lower early Monday, shortly before the regular session opening. The price action suggests that last Thursday’s technical reversal bottom and Friday’s subsequent follow-through rally were fueled by short-covering and not by aggressive counter-trend buying.

At 0903 GMT, September Natural Gas futures are trading $2.706, down $0.022 or -0.81%.

Last week, short-sellers drove the market to its lowest level since December 27, 2017 on concerns over strong production and the return to more average temperatures in several key demand areas over the near-term.

The futures market rallied on Thursday and followed through to the upside on Friday after the U.S. Energy Information Administration reported a smaller-than-expected storage injection during the week-ending July 13.

According to the U.S. Energy Information Administration (EIA), domestic supplies of natural gas rose by 46 billion cubic feet for the week-ended July 13. Traders were forecasting a build of about 59 billion cubic feet, while the average over the last five years for the same week was a rise of 62 billion.

Total stocks now stand at 2.249 trillion cubic feet, down 710 billion cubic feet from a year ago, and 535 billion below the five-year average, the government said.

Forecast

According to NatGasWeather.com for the period July 23 to July 29, “Strong upper high pressure will dominate the western and southern U.S. with highs of 90s to 110F, hottest from California to Texas for strong regional demand. A warm and humid weather system will impact the East the next few days, with showers and thunderstorms with highs of mid-80s to near 90F. Cooler weather systems will arrive into the Midwest and east-central U.S. over the coming week with showers and comfortable temperatures of only 70s to lower 80s. Overall, demand will be high over the West & South, and moderate across the Midwest & East-Central U.S.”

A longer-term forecast was issued by the National Weather Service late last week. This shouldn’t have too much of an effect on the nearby futures contract but could affect the deferred nat gas futures contracts.

“La Nina conditions with cooler-than-normal sea surface temperatures across the equator of the Pacific Ocean last winter into spring has transitioned to warmer than normal sea surface temperatures the past few months. This indicates a flip toward El Nino, which is expected to hold in a weak to moderate state going into the winter months. El Nino tends to produce a milder than normal winter over the northern U.S. and will be watched closely by the markets the next several months to see how it evolves.”

Technically, the short-term range is $2.671 to $2.752. Its 50% to 61.8% zone at $2.712 to $2.702 is currently being tested. Trader reaction to this zone will determine the near-term direction of the market.

A sustained move over $2.712 will signal the return of buyers. This will be a combination of short-covering, profit-taking and some speculative technical buying. The short-covering will get stronger if buyers take out $2.752. At this point, we may have to start preparing for a major retracement into another 50% level at $2.831.

A sustained move under $2.702 will indicate the return of sellers. If the selling pressure increases on this move then look for sellers to go after last week’s low at $2.671.