Natural gas pops & drops, traders eye the weather forecasts

Mike Zaccardi, CFA, CMT

Natural gas prices opened last week on a strong note, climbing from $1.72 in Sunday night futures trading to the week’s peak near $1.93 on Tuesday as weather model guidance trended hotter for the coming two weeks. Sellers said ‘not so fast’ though as the August contract then dropped later on Tuesday into Thursday morning on rather light volume.

Thursday’s EIA storage report, issued at 10:30am ET, showed a generally in-line with expectations build to storage at +56 Bcf. The report, while not a big surprising number, brought about another fresh round of selling pressure which lasted into Friday morning. The week’s low was touched near $1.74 early Friday morning. A significant rally took place late Friday, which may have just been some short-covering into the weekend.

Fundamentally, natural gas production has ticked higher from the lows in May and LNG demand is incredibly soft. Production peaked on November 30, 2019 near 96 Bcf/day and fell to the mid-80s Bcf/day about two months ago as oil and gas exploration and production firms announced capital expenditure cuts, and some have even filed for bankruptcy. Oil prices rebounded though, so that kept many of said firms afloat, and able to keep producing crude oil and natural gas. As such, natural gas production has recovered.

What has not recovered is LNG demand due to very soft non-USA pricing and weak demand in Europe & Asia. The EIA updated their LNG export outlook earlier this month to even lower levels before a recovery next year.

All the while, natural gas demand for electricity generation here in the United States may set records this week or next due to incredibly low prices and hot temperatures. Coal continues to get priced out of the market and renewable generation is weak this time of year – so natural gas fired generation is called on in a big way.

This morning, natural gas for August delivery is about unchanged despite rather weak weekend weather model guidance changes. This week was projected to be extremely hot, but now may just be a tad sweltering.

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Chart used with permission from Tradingview.com