Natural Gas Price Fundamental Weekly Forecast – Unusual Strength May Be Related to Reduced Production, Late Month Heat

Natural gas futures broke out of a two-week range to finish higher for the week with buyers getting help from a drop in production. Futures were dragged higher by strengthening forward prices, which rose despite the absence of early summer heat in the weather forecasts to drive demand.

Technically, the rally looks impressive, but some fundamental traders doubt the move can be sustained because the supply cuts may be temporary due to pipeline maintenance.

For the week, July natural gas futures settled at $2.655, up $0.055 or +2.12%.

U.S. futures had an up and down week before Friday’s surge, showing weakness early in the week on a mix of below- and above-normal temperatures. Tuesday’s technical closing price reversal bottom indicated the presence of buyers.

On Thursday, traders shrugged off another government storage build, helping to set the tone for Friday’s surge. Slightly higher demand overall due to the addition of heating degree days in the East and the risk of warmth returning to the South also helped revive prices, according to Bespoke Weather Services.

U.S. Energy Information Administration Weekly Inventories Report

On Thursday, the EIA reported an above-average 85 Bcf weekly injection into U.S. natural gas stocks, matching the 85 Bcf build recorded for the year-ago period but larger than the 72 Bcf five-year average. Total Lower 48 working gas in underground storage stood at 1,547 Bcf as of May 3, 128 Bcf (9.0%) more than year-ago levels but 303 Bcf (minus 16.4%) below the five-year average.

Short-Term Weather Outlook

NatGasWeather, for May 10 to May 16, says “Numerous weather systems will impact the southern and eastern US the next several days with heavy showers and thunderstorms. Lows across the central and northern US will drop into the 30s and 40s through the weekend for a little stronger demand. The southern US will cool in some areas such as Texas and the Southwest into the 60s and 70s, but still quite warm over the Southeast/Florida with 80s to lower 90s. The West will see a mix of mild to warm due to weather systems. Warming will occur over the southern and eastern US mid-next week. Overall, demand will be low to moderate into next week, then low.”

Weekly Forecast

Last week’s rally and especially the surge on Friday that changed the trend to up on the daily chart is a little odd for this time of year, especially since sustained summer heat could be weeks away and last Thursday’s EIA storage data further indicated weaker balances on a weather-adjusted basis, according to Bespoke.

The rally may be all about the reduced production, which means the move is not likely to be sustained over the near-term. Nonetheless, we have to respect the technical upside momentum until proven otherwise. The lack of follow-through to the upside early this week will be the first sign of weakness.

We can’t just come in selling with both hands on Monday because buyers may actually be responding to the potential for above normal heat later in the month, which could tighten up balances.

If there is no heat in the forecast and production concerns are lifted then look for prices to retreat.