Natural gas futures are edging lower early Thursday, shortly before the regular session opening and the release of the weekly government storage report at 1430 GMT. The weakness is being fueled by a combination of technical and fundamental factors.
At 0828 GMT, September natural gas futures are trading $2.745, down $0.013 or -0.47%.
Let’s take a look at the chart since technical factors are playing an equal role in the market’s weakness as much as the fundamentals.
The main range is formed by the June high at $2.992 to the July low at $2.671. Its 50% to 61.8% retracement zone at $2.831 to $2.869 is the primary upside target and resistance. The lower or 50% level at $2.831 stopped the buying on Tuesday.
The short-term range is $2.671 to $2.831. Its retracement zone at $2.751 to $2.732 is the primary downside target. This zone is currently being tested. Since the short-term trend is up based on the higher-high, higher-low chart pattern, buyers are likely to show up inside this zone.
Fundamentally, sellers are reacting to reports of record-level production and the potential for cooler temperatures after mid-month.
The U.S. Energy Information Administration (EIA) on Tuesday updated its monthly production data, showing U.S. natural gas output for May, setting a new all-time record. The EIA said May 2018 production averaged 80.4 Bcf/d (2,491 Bcf total), an 8.6 Bcf/d (12%) increase year/year (y/y) and the highest total recorded by the agency for data going back to 1973.
Short-Term Weather Outlook
According to NatGasWeather.com, “The latest weather data held cooler trends from Tuesday with a weather system tracking across the U.S. Midwest and Northeast August 8-10, and was also a touch cooler going into mid-August, thus seen cooler trending overall as it shred several cooling degree days (CDD).”
“Beyond next week, a weather system is expected to weaken the ridge over the Midwest and Northeast August 8-10, dropping highs into the 70s and 80s as showers sweep through for lighter demand; this is where the latest weather data during the last 24 hours has shown cooler trends,” NatGasWeather said.
“The weather data had been bouncing between warmer and cooler trends August 11-15, but has been a little cooler more recently. It’s still expected to be a very warm pattern August 11-15 as upper high pressure rebounds to dominate most of the country with highs of 80s to 100s, just slightly less impressive compared to what the data was showing early in the week,” NatGasWeather said.
The EIA production data and the short-term weather forecast is putting the pressure on the market. The weather is likely to change, but the production is likely to remain steady to higher. Therefore, we don’t expect any major rallies over the near-term, but we could see a rangebound trade with support at $2.751 to $2.732 and resistance at $2.831 to $2.869. Additional support is the bottoms at $2.685 and $2.671.
Estimates for today’s EIA storage report are coming in at around 43 Bcf. Kyle Cooper of IAF Advisors is projecting a 40 Bcf build, while a Bloomberg survey had a range between 25 Bcf and 58 Bcf, with the median response of survey participants coming in at 43 Bcf. Intercontinental Exchange settled at 43 Bcf.
Based on the early price action, we could see an upside bias developing on a sustained move over $2.751 and for a downside bias to develop on a sustained move under $2.732.