Natural Gas Price Fundamental Weekly Forecast – Average Temps, Steady-to-Higher Production Should Limit Gains

Natural gas futures finished unchanged last week after an attempt to challenge summer tops at $2.995 and $3.025 failed to gain traction following the release of a government report showing a bigger-than-expected storage injection the previous week.

For the week, October Natural Gas futures settled at $2.949, unchanged.

The price action suggests that short-sellers and seasonal traders may be starting to win the battle against speculative buyers. The short-sellers may have increased bets that record production and the return of average temperatures would shrink the current storage deficit before the start of the winter heating season around November 1.  Speculative buyers may be holding on to hope that another wave of hotter-than-usual temperatures would leave storage in a precarious situation at the end of the summer cooling season.

The price action on Thursday and Friday last week could be a sign of things to come this week. Prices retreated on Thursday after a government report showed the weekly storage injection was higher than expected. However, prices recovered a little as investors realized that despite the increase in supply, the deficit the market is facing continued to widen.

Bullish traders like the idea that year-to-date inventories are at an eight-year low. As citied by the U.S. Energy Information Administration on Thursday, total stocks are 2387 Bcf for the week-ending August 10. Inventories are 687 Bcf less than stocks one year ago and 595 Bcf less than the five-year historical average.

Bearish traders are betting the weak buying will allow the shorts to take control the rest of the month. They point out that even with inventories at this level for this time of year, all the market could do last week is reach its highest level since June 27. Additionally, it has not broken the $3/MMBtc market since June 15.

Forecast

With natural gas rapidly approaching the so-called “Shoulder Season”, bearish traders are counting on a big drop in demand and a steady-to-higher rise in production. In a perfect situation, this scenario should lead to lower prices over the near-term. In order for a bearish scenario to develop, temperatures are going to have to remain at average or below average levels and production has to remain over 80 Bcf/d.

Current data from S&P Global Platts Analytics show that dry gas production has averaged 78.2 Bcf/d thus far this year, which is 6.2 Bcf/d greater than this time last year. Platts went on to further say that it projects dry gas production to average 81.7 Bcf/d for the next two weeks.

If production hold steady at 81.7 Bcf/d and temperatures hover around average then look for October natural gas futures to revisit $2.865 to $2.838 or even lower.