Natural Gas Price Fundamental Weekly Forecast – Prices Weak on High Production, Low Consumption

A change in the weather pattern may have encouraged the last of the longs to exit their speculative positions last week, driving September Natural Gas futures to levels not seen since April 11, 2016. The liquidation selling also took out the early winter low at $2.800 and last year’s summer low at $2.770.

September Natural Gas futures settled the week at $2.774, down $0.167 or -5.68%.

The catalyst behind the selling was a weather model calling for steady, near-normal temperatures and cooling demand over the next two weeks.

Natural Gas Rig Count

Besides the weather, bullish traders were also expressing concerns over production. During the week-ending July 28, the U.S. natural gas rig count rose by six to 192 rigs, according to Baker Hughes. The increase in the number of crude oil rigs has also had an impact on natural gas prices.

Natural gas is a by-product of crude oil drilling. As on July 28, U.S. crude oil rigs have risen by 392 or 105% year-over-year. The number of producing rigs is also up 142% since the lows in May 2016.

Rising crude oil prices have encouraged more drilling. If this trend continues then natural gas production could continue to increase in lock-step with the rise in crude oil rigs.

The good news for the bulls this week was Friday’s report stating that the natural gas rig could decreased by three to a total of 189 during the week-ending August 4. The count for natural gas rigs is now up 108 year over year.

Monthly U.S. Natural Gas Production

In other news, according to the U.S. Energy Information Administration (EIA), monthly U.S. dry natural gas production rose by 2.69 Billion Cubic Feet per day (Bcfd) to 74.29 Bcfd in May 2017, compared to the previous month. Additionally, U.S. dry natural gas production rose by 3.8% week-over-week, but fell 1% YoY. This put production at a 10-month high.

Monthly U.S. Natural Gas Consumption

The EIA also said monthly U.S. natural gas consumption fell by 0.92 Bcfd to 62.6 Bcfd per day in May 2017, compared to the previous month. This put consumption at a 2-month low. For the week, consumption was down 1.5% and 3.02 Bcfd or 4.6% year-over-year. The mild spring and summer temperatures led to the drop in natural gas consumption.

Forecast

The drop in natural gas prices is easy to explain when taking into account production and consumption. Simply stated, prices will fall as long as production exceeds consumption. How can this problem be fixed? Cutting production will not do it alone. We’re going to need more consumption and given the current weather pattern, we may not see this until the winter season begins. Additionally, a lower U.S. Dollar may help drive up exports so less gas will be sent to storage.

Even though prices fell last week, the Weekly EIA Storage Report indicates that higher prices may be in the future. Stockpiles fell week over week to 8.5% below last year’s level, but they remain 3% above the five-year average.

The EIA reported that U.S. working stocks of natural gas totaled about 3.010 trillion cubic feet, around 87 billion cubic feet above the five-year average of 2.923 trillion cubic feet and 279 billion cubic feet below last year’s total for the same period. Working gas in storage totaled 3.289 trillion cubic feet for the same period a year ago.

I have a bearish short-term outlook and am trying to find a reason to turn bullish on the long-term. What’s encouraging for me is the relatively low stockpiles. I’d like to see it fall below the five-year average by the start of the winter heating season.