Natural Gas Price Fundamental Weekly Forecast – Mixed Demand, Strong Production Could Weigh on Prices

Natural gas futures settled higher last week, highlighted by a volatile two-sided trade. Early in the week, the market soared to multi-month highs as concerns over power-plant maintenance and pipeline issues encouraged short-sellers to cover aggressively. Strong speculative buying also drove the price action.

Professionals seemed to be caught off-guard by the move since prices were expected to settle into a sideways-to-lower trade ahead of the start of heating season in November. The market is particularly sensitive to issues regarding supply at this time due to a widely expected storage deficit this winter.

For the week, November natural gas futures settled at $3.143, up $0.135 or +4.49%.

After spiking higher into mid-week, prices retreated on Thursday, following the release of a bearish government storage report. Speculative buyers also booked profits and short-sellers re-emerged on the hopes that a change in the weather pattern and record production would drive prices lower.

U.S. Energy Information Administration (EIA) Weekly Storage Report

The EIA reported a 98 Bcf storage build for the week-ending September 28. This came within the estimates, but was as much as 20 Bcf above some forecasts.

With the 98 Bcf build, inventories grew to 2866 Bcf, 636 Bcf below year-ago levels and 607 Bcf below the five-year average. Broken down by region, the EIA reported a 36 Bcf injection in the Midwest, a 34 Bcf build in the East and a 22 build in the South Central.

Forecast

Natural gas could be under pressure this week due to offsetting heating and cooling demand.

East Coast Region

The latest weather reports call for the East to be warm which should lead to a decline in power burns. According to S&P Global Platts Analytics, “the power burn is estimated to drop and average over the next eight to 14 days as cooling demand continues to decrease.”

Northern and West Regions

The declines in the East coast power burn are expected to be offset by gains in heating demand across much of the Northern and Western parts of the country. The National Weather Service is calling for a likelihood of cooler-than-average temperatures across much of these regions over the next eight to 14 days.

Last week’s huge storage build also resulted in bearish sentiment in the market. It also raised concerns over record U.S. production.

The good news is that last week’s rally raised the current trading range, suggesting the buying is getting stronger as we head into the winter heating season. This also supports our bullish upside bias. The breakout over the old trading range of $2.75 to $3.08 likely means we could see a pullback into the top of this range, making $3.08 the next downside target.

Buyers may try to establish new support at $3.08 this week, however, the timing may be off. Furthermore, weakness in the spot market could drive November natural gas prices into $3.004 to $2.943, which is the best support zone. Since the trend is up, buyers are likely to step in on a test of this zone.