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James Hyerczyk
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Natural Gas

Natural gas futures tumbled last week with a surprisingly larger-than-expected government inventory report contributing the most to the losses. The size of the storage injection raised concerns for the bulls over supply growth, which weighed on prices.

The October futures contract expiration and deep discounts on spot market deals also helped drive prices lower despite forecasts calling for unseasonable heat over the short-run and an early cold snap in the Northwest.

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Last week, November natural gas futures settled at $2.404, down 0.151 or -5.91%.

The week-ended with Bespoke Weather Services issuing a warning about lower prices.

“Natural gas prices have now declined each of the last two weeks, with the new prompt month November contract settling just over the $2.40 support level, which also is very close to the contract’s 50-day moving average,” Bespoke told clients Friday. “There is the chance that prices pause here,” as recent price declines “could tighten up balances somewhat, and we still have some elevated demand to go through for another week or so.”

“But unless balances tighten in a significant way, or the higher demand regime can persist longer, it is likely to be tough to avoid more downside in prices.”

U.S. Energy Information Administration Weekly Storage Report

On Thursday, the U.S. Energy Information Administration (EIA) reported a larger-than-expected weekly injection into U.S. natural gas stocks, topping even the highest estimates.

The EIA reported that domestic supplies of natural gas rose by 102 billion cubic feet for the week ended September 20.

Traders were looking for the EIA report to show an injection in the upper 80s or low 90s Bcf for the week-ending September 20.

A year ago the EIA reported a 51 Bcf build. The five-year average is a 74 Bcf injection.

Total stocks now stand at 3.205 trillion cubic feet, up 444 billion cubic feet from a year ago, but 47 billion below the five-year average, the government said.

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Short-Term Weather Outlook

According to NatGasWeather for September 27 to October 3, “High pressure will strengthen to unseasonably strong levels across the southern and eastern halves of the country this weekend through next week with very warm to hot conditions as highs reach the 80s to 90s. It will be hottest across from Texas to the Southeast for relatively strong late season demand. At the same time an early season cold shot will advance into the West with valley rain and mountain snow with lows dropping into the chilly 20s to 40s for modest early season heating demand. Essentially, stronger demand the next seven days with a better mix of heating and cooling needs.”

Weekly Forecast

Given the rapid change in the fundamentals and the weekly technical picture, we’re expecting lower prices this week.

Fundamentally, rising production levels are probably the biggest concern for bullish traders.

EBW Analytics Group said, “The ‘startling’ injection figures from EIA Thursday could signal gaps in the market’s read on production volumes.

“A single major storage miss is often an anomaly,” EBW analysts said. “The recent pattern suggests, however, that production is running substantially higher than published estimates. This may be due to completion of new intrastate lines and gathering systems, and the return of pipelines from fall maintenance and forced outages.”

The means the next two or three EIA reports “will be critical to gauge whether production estimates should be raised and, if so, by how much.”

Technically, the main trend is up on the weekly chart, but momentum has been trending lower since the formation of the potentially bearish closing price reversal top at $2.745 on September 17.

The short-term range is $2.135 to $2.745. Last week, the market closed inside its 50% to 61.8% retracement zone at $2.440 to $2.368. Trader reaction to this zone will determine the direction of the market this week.

Look for a bullish tone to develop on a sustained move over $2.440. Since the main trend is up, buyers could come in on a test of the retracement zone in an effort to form a secondary higher bottom.

A bearish tone will develop on a sustained move under $2.368. If this move generates enough downside momentum then look for the selling to possibly extend into the contract low at $2.135 over the near-term.

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