Natural gas futures are edging higher on Monday, returning to a key technical resistance area, as traders continue to react to robust export demand and strong power burns despite the easing tightness in the domestic supply/demand balance as revealed in the latest Energy Information Administration (EIA) weekly storage report.
At 10:08 GMT, December natural gas futures are trading $5.986, up $0.223 or +3.87%.
Global Supply Shortage Fears
Natural Gas Intelligence (NGI) wrote after Friday’s close that NYMEX futures struggled to disconnect themselves from global markets. Supply shortage fears were on full display this week in Asian and European markets, boosting prices to record levels. Despite an improving supply picture in the Lower 49, though, U.S. gas prices followed suit.
Strong Power Burns Continue
NGI also reported that in the cash market strong power burns continued despite the end of the summer. Even with a drop in temperatures, gas continues to capture a large share of total generation.
Tudor, Pickering, Holt & Co. analysts said coal continued to lose share through September. Weekly data suggests coal production has risen in the past two weeks, “but with an enticing global market, we suspect the export picture to remain a key factor amidst a total global energy market.”
Short-Term Weather Outlook
Bespoke Weather Services said, “The pattern continues to favor very warm weather in the northern half of the nation,” suppressing early season heating demand, “while having a lack of strong heat in the southern U.S.” to also limit cooling demand, Bespoke said.
“In addition, the pattern still looks set to continue its warm theme beyond day 15, meaning that it is not out of the question we make a run at October 2016’s record low GWDD count,” Bespoke said.
While weather trends will likely matter more “starting in the middle third of October, our expectation is that warm/bearish weather will persist beyond the middle of October, if not at least early November, which could add some yet to those storage levels,” according to the firm.
According to NatGasWeather for October 4 – October 10, “A messy pattern continues as numerous weather systems again impact the U.S. this week. One system is over the Northwest, a second tracking into the Southwest mid-week, and a third extending from the Great Lakes to the South and Southeast.
Temperatures with these systems will reach the 50s to 70s besides the warmer one tracking into the Southwest and Texas mid-week with highs of 80s. The rest of the U.S. remains nice to warm with highs of 60s to 80s besides locally hotter 90s early this week Southwest deserts and portions of Texas.
Overall, national demand will be low to very low into the foreseeable future.”
Our work suggests the direction of the December natural gas market on Monday will be determined by trader reaction to the short-term retracement zone at $5.947 to $6.060.
Look for a bullish tone to develop on a sustained move over $6.060. Taking out Friday’s high at $6.141 could trigger an acceleration to the upside.
A bearish tone should develop on a sustained move under $5.947. The first downside target area is $5.652 to $5.469.
Buyers could come in to defend the trend on a test of $5.652 to $5.469. However, if $5.652 fails as support, the main trend will change to down. This could trigger an acceleration into the best support zone at $5.185 to $4.892.
The weather news is bearish and the supply/demand scenario is loosening. What’s holding up this market is the strong LNG demand from Europe and Asia. If this demand starts to crumble then look for a steep drop in natural gas prices.