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James Hyerczyk
Natural Gas
Natural Gas

Natural gas futures finished higher last week in a wicked trade. The market was driven sharply higher early in the week in reaction to Hurricane Michael, which led to a shutdown of production facilities. The market topped out once traders determined the direction of the storm. Due to the damage it caused, demand is expected to drop in the region.

For the week, December Natural Gas futures settled at $3.226, up 0.038 or +1.19%.

Traders also reacted throughout the week to other weather-related and production issues. The return of cold weather into the equation was a little supportive, but this news tended to be offset by reports of increasing production.

On Thursday, the Energy Information Administration (EIA) reported a 90 Bcf injection into natural gas storage inventories for the week-ending October 5. The report was close to the target forecast with guesses clustered between high 80s Bcf to low 90s Bcf.

The EIA report from the week-ending October 5 featured a low miss. Last week’s report for the week-ending October 12 was a high miss, so essentially the injections cancelled out each other. The driving news, however, was that the weakness since October 9 suggests conditions have loosened up a little since hurricane fears subsided.

Potentially pressuring prices this week is the news that burns are beginning to loosen and production is continuing to grow. Furthermore, Canadian imports are expected to rise this week.

Weekly Weather Forecast

NatGasWeather.com for October 15 – October 21 says, “Cool air will push south through the Rockies and Plains and into North Texas and portions of the South Sunday through Tuesday with highs of 40s and 50s and areas of heavy showers. A colder weather system will sweep across the Midwest and towards the Northeast with lows of teens to 30s. Another reinforcing cool shot will follow into the northern U.S. Wednesday through Thursday, but then a milder break between weather systems across the northern and eastern U.S. Friday through Saturday before the additional cool shots arrive. The West will see a mix of cool and warm conditions. Overall, national demand will be high.”

Forecast

The longer-term trend remains bullish because the heating season will begin with U.S. supplies of natural gas about 17 percent below the five-year average for this time of year. Prices are already trading at last January’s highs and speculators have shown recently that they are willing to buy strength.

Falling temperatures over the near-term should be supportive, but gains could be limited by high production. Nonetheless, we’re going to maintain our strong upside bias.

According to new EIA forecasts, natural gas inventories will reach 3.263 trillion cubic feet at the end of October, but that would be the lowest end-of-October level since 2005.

Based on last week’s performance where the December Natural Gas futures contract hit a high of $3.409, then hung on to close barely higher at $3.226, it’s going to take a lot to drive this market through last week’s high.

If last week’s low at $3.202 fails as support then we could see an eventual move into the weekly retracement zone at $3.125 to $3.057. This is a value zone and should attract new buyers.

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