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James Hyerczyk
Natural Gas

Natural gas futures settled higher last week as hot weather finally arrived, putting pressure on some of the weaker short-sellers to cover. There was probably some speculative buying too, but it was negligible given the current high supply situation and demand destruction. Let’s just say that the trend is down, but momentum is showing signs of shifting to the upside, at least temporarily.

Last week, August natural gas settled at $1.734, up $0.190 or +12.31%.

Although hot temperatures over key demand areas in the United States were responsible for most of the rally, a smaller-than-expected government storage build also contributed to the gains.

U.S. Energy Information Administration Weekly Storage Report

According to EIA estimates, working gas in storage was 3,077 Bcf as of Friday, June 26, 2020. This represents a net increase of 65 Bcf from the previous week. Stocks were 712 Bcf higher than last year at this time and 466 Bcf above the five-year average of 2,611 Bcf. At 3,077 Bcf, total working gas is within the five-year historical range.

The consensus estimate was for a 77 Bcf storage build. The national survey averages called for a build of +74-79 Bcf. NatGasWeather’s algorithm predicted a build of 68 Bcf.

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Short-Term Weather Outlook

According to NatGasWeather, “the Fourth of July weekend will remain very warm to hot over most of the U.S. with highs of upper-80s to 100s besides the far northwest and northeast corners. There will also be heavy showers over the Southeast this weekend, although still very warm & humid with highs of upper 80s to lower 90s.

Overall, national demand will be high.”

Weekly August Natural Gas

Weekly Forecast

There was nothing particularly unusual about last week’s price action. Basically, the market went up on hot weather demand and a better than expected EIA storage report. Traders probably built in an even smaller build for the week-ending July 3.

Given the long-holiday weekend, we’re likely to see a gap in prices in either direction, depending on the changes in near-term forecast. This weekend’s heat has already been priced in.

Remember that traders are looking 14 days out. So if the forecasts continue to call for extended heat until at least July 19 then prices are likely to remain underpinned and the threat of further short-covering will remain at the forefront.

The main range is $2.447 to $1.517. If the upside momentum continues then its 50% to 61.8% retracement zone at $1.982 to $2.092 will remain a reasonable upside target. Short-covering is likely to take us there and some speculative buying, but I don’t expect the major players to trade the long side. They are likely to short the rally if it reaches the retracement zone.

For a look at all of today’s economic events, check out our economic calendar.
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