Natural Gas Price Fundamental Weekly Forecast – Weak Demand Until Heat Intensifies

Natural gas prices finished sharply lower last week as favorable weather conditions are expected to continue until at least the third week of June raising concerns that weak demand would lead to additional triple-digit storage builds.

Given the current downside momentum, prices are likely to continue to fall towards the psychological $2.000 level. Additionally, $2.500 is now the new ceiling.

Last week, July natural gas futures settled at $2.337, down $0.117 or -4.77%.

Nearby natural gas futures hit a fresh three-year low last week after U.S. government storage data showed a weekly injection in domestic supplies that exceeded the pre-report forecasts. Additionally, according to the data, the injection was greater than the five-year average.

Although some of the weather forecasts are starting to show warming trends in the latest data released midday Friday, much of the United States was expected to remain rather comfortable.

U.S. Energy Information Administration Weekly Storage Report

The EIA reported another huge 119 Bcf build into inventories for the week-ending May 31. The reporting period included the Memorial Day holiday, which analysts blamed as the primary reason for the large miss.

The number was well above last year’s 93 Bcf injection and the five-year 102 Bcf average build.

Short-Term Weather Outlook

According to NatGasWeather for June 7 to June 13, “A slow moving weather system will track across the South and Southeast into the weekend with heavy showers and cooling with highs mainly in the 80s. The Southwest into Texas will still be very warm to how with highs of upper 80s to 100s. A weather system across the Northwest will bring cooling, while the rest of the northern US will be mostly comfortable with 70s and 80s. During the middle of next week, a strong weather system will track across the northern and central US with another round of showers and cooling with highs of 60s and 70s, while also preventing widespread southern US heat with highs of mostly 80s besides the hotter Southwest. Overall, demand will be low.

Weekly Forecast

Hotter temperatures are forecast for later in the month so this week’s price action may start to reflect these concerns. Therefore, the selling pressure may not be as intense as we’ve seen the past two weeks. Remember that professional traders tend to look at forecasts 10 to 21 days into the future.

Late Friday, NatGasWeather made a few tweaks to its mid-term outlook. “The overnight weather data was little changed through next week, although most datasets were a little hotter around June 17-21^st. It’s important to note the GFS remains hotter than the European model after June 15^th, with differences in need of resolving, which likely won’t occur until the weekend break.”

“We see the risk being towards the weather data adding demand through hotter trends over the weekend, especially after June 18^th, although likely still not enough to trend solid bearish weather sentiment bullish. Until the weather data shows more ominous heat gaining ground across the southern and eastern US, larger than normal builds should be expected to continue.”

Basically, the introduction of hotter temperatures may slow down the selling, but if it does lead to a short-covering rally, then these gains are likely to be limited due to large storage builds.

Watch the language used in the weather reports. Don’t expect a prolonged rally until forecasters start using terms like “heat dome”.