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Natural Gas Price Fundamental Weekly Forecast – Low Demand Outlook Puts Bears in Control

James Hyerczyk
Inventories continue their upward trajectory

Natural Gas futures closed lower last week, while falling below the psychological $2.500 level in the process. The catalysts behind the selling pressure were a larger-than-expected weekly government storage build and a new forecast calling for milder temperatures in early June. A nationwide plunge in the spot market also contributed to the weakness as well as nervousness over U.S. trade policy. Traders are also monitoring the situation between the United States and Mexico.

For the week, July Natural gas settled at $2.454, down $0.157 or -6.01%.

Anxiety over U.S. Trade Policy

Powerhouse CEO Alan Levine told Natural Gas Intelligence, said President Trump’s new tariffs on Mexico appeared to drive bearish sentiment across multiple energy futures markets Friday,

“We’re starting to develop export markets for natural gas. I think there’s a lot of anxiety now as to what might be available there,” Levine said. “Remember, we’re not the only ones that can interfere with the normal flow of business. So we could easily find…a lot of the markets that we thought might be useful as offtakers” for U.S. supply could close up, at least temporarily.

“I don’t think it’s out of the question that we could see natural gas, because of all the production we’re seeing, fall all the way down to” an “ultimate low” at $1.611, the low set back in March 2016, Levine said. “I’m not day it’s going to happen, but I don’t think we can ignore that possibility. “…I think this is not a good sign for the bulls. The question becomes, where does the next rally come from? And silence is deafening.”

Short-Term Weather Outlook Not Helping Bulls

“Weather patterns for the first half of June continue to show upper high pressure not being strong enough to expect widespread or impressive heat,” according to NatGasWeather. “With that said, weather patterns are likely to add a little demand over the weekend,” as the Global Forecast System did in its midday run Friday.

Weather-driven demand gains “would need to be considerable if builds are to finally print smaller than the five-year average,” the forecaster added.

NatGasWeather says for May 31 to June 6, “Weather systems with showers and thunderstorms continue across the West, although warmer with highs of 70s to near 100F, hottest over the Southwest. Texas to the Mid-Atlantic Coast remains very warm to hot with highs of 80s & 90s, although cooling by several degrees over the Southeast as upper high pressure weakens. Mostly warm conditions continue from Chicago to NYC with highs of upper 60s to 80s, although with showers and slight cooling late this weekend. Hot high pressure will strengthen over Texas & the South early next week, then weakening late in the week as weather systems arrive. Overall, demand will ease to low as coverage and intensity of 90s eases.”

U.S. Energy Information Administration Weekly Storage Report

The EIA on Thursday reported a much larger-than-expected 114 Bcf injection into U.S. natural gas storage for the week-ending May 24, adding to the bearish momentum created by the mixed weather forecasts. Traders were looking for a build of 98 Bcf. A year ago, the EIA reported a 95 Bcf build. The five-year average is for a 97 Bcf injection.

Adding to Thursday’s volatility following the release of the number was the wide range of guesses from several analysts. Bloomberg was looking for a 98 Bcf build with a range of 94 Bcf to 104 Bcf. Reuters was looking for a 101 Bcf injection with a range of 91 Bcf to 110 Bcf. ICE EIA Financial Weekly Index futures settled Wednesday at 100 Bcf, while Natural Gas Intelligence’s model called for a 98 Bcf build.

Weekly Forecast

The surprise jump in the EIA report combined with the change in the weather pattern forced me to change my early summer outlook. Although I was looking for a big triple-digit print at some time before the official start of cooling season, I thought it would be forecast. Furthermore, I didn’t expect the rout in the energy complex on Friday. The only bright spot was identifying the wall of resistance that stopped last week’s gains.

The weather outlook is soft, but when combined with the anxiety created by the uncertainty over U.S. trade policy, a gloomier picture emerges.

The EIA forecast for the week-ending May 31 will be a tricky endeavor due to last Monday’s Memorial Day holiday. We’re likely to see a wide range of forecasts. Early forecasts are calling for a build of 105 Bcf to 108 Bcf. This is down about 20 Bcf from the first forecast issued on May 16.

With the nearby futures contract closing below $2.500 since June 2016, some charts are already indicating prices to trade as low as $2.000 before the winter heating season begins.

This article was originally posted on FX Empire