NatGas Prices Capitulate: Will Winter Supply Worry Spark New Rally?

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Often with market rallies, the end can come sooner than investors think. In just a week, US natural gas suffered its worst losing streak in seven months, making a dramatic debut into negative territory from the summer’s highs.

While it may still experience a price run-up from low inventories when winter heating kicks in, gas could also have higher-than-anticipated stock refills from the record production that has persisted most of this year. The latter could exert further pressure on prices, especially if there is a reading for more mild temperature, and cause headaches for investors holding bullish positions in the hope of a winter rally.

Between the two scenarios, the market likely “will continue to soften as temperatures ease over the next week” and summer heat moves further west from the key gas-consuming US East Coast, said Daniel Myers, analyst at Gelber & Associates, an energy markets consultancy in Houston.

Booming Production Set To Continue

Booming gas production will also have a chance to make a bigger mark on storage in the near-term, Myers wrote in a commentary on Thursday after the US Energy Information Administration (EIA) reported for the second week in row a gas inventory buildup above market estimates.

Utilities injected 63 billion cubic feet (bcf) of gas into underground salt caverns for the week ended August 31, after what was left from generating electricity to meet last week’s high air-conditioning demand.

Analysts had estimated an injection of 62 bcf for last week. While the excess reported by the EIA was modest, in the previous week the buildup was also higher than expected, at a two-month high of 70 bcf versus a forecast 64 bcf. More importantly, the latest inventory growth was almost near the five-year average of 65 bcf, a target not achieved till middle of August as record gas production was virtually matched by phenomenal air-conditioning demand due to sweltering heat.

Winter Stockpile Caution May Be Exaggerated

But some veteran gas watchers said the long-standing practice of ensuring winter stockpiles stood at or above five-year averages may not matter as much these days when abundant, cheap gas was flowing out of the country’s many shale oil fields.

Dominick Chirichella, analyst at the DTN-Energy Management Institute in New York, who has followed the gas market for 37 years, said:

“I am of the view that with even with total inventories projected to end the injection season anywhere from 15 to 20 percent below the so called normal or five-year average, the market may be discounting this data point.”

“The required inventory level heading into the winter heating season may be lower than what it (historically) has been,” Chirichella wrote in a note on Thursday, adding that the market could be at the cusp of a new paradigm in supply/demand, depending on how investors react to the first chilly days of the coming cold season.

Longest Losing Streak For Gas Since February

In Thursday’s session, October, the front-month gas contract on the New York Mercantile Exchange, settled down for a fifth day in a row at $2.772 per million British thermal units (mmBtu). It was the longest losing streak for NYMEX gas since early February.

NatGas Prices Capitulate: Will Winter Supply Worry Spark New Rally?

NatGas Weekly Chart

Without a marked rebound on Friday, October gas was on course to lose 5 percent on the week, the sharpest weekly loss in seven months. Year-to-date, the market was into negative territory with a drop of 2.3 cents per mmBtu, or 0.1 percent. But compared with the high of $3.661 achieved in January at the peak of the 2017/18 winter season, the contract was down almost 89 cents, or 25 percent.

binary-news.top has a “Strong Sell” recommendation on October gas, which trends below all daily moving averages and technical barometers that would mark a buy.

Until last week, market bulls appeared to have dug in for a long fight to keep gas prices closer to the $3 level critical to their psyche.

$3 Target Gone But Some Support Lingers

“I think for the time being, the $3 target has run its course,” Myers told binary-news.top on Thursday. He added:

“I think there is some support around the $2.70 level, the area where it is retracing now…If we break that point, there is a 2-year low of around $2.55 that would probably set the alternate floor.”

But Myers was also hedging his bets in the event gas injections underwhelmed in the coming weeks. He said:

“There is still some backing to keep prices from collapsing completely…I know we’ve had a kind of an abrupt price tumble early this week but going forth, I think it will be more gradual, probably bounce around a bit until it slides to the $2.70 mark.”

Mike Seery, who generates buy/sell recommendations off both the fundamentals and technicals of natural gas, shared that view.

“I might be recommending a counter trend trade if prices test the 2.70 level as winter is right around the bend,” said the founder of Seery Futures in Plainfield, Illinois. He added:

“You can see some explosive moves to the upside during that time-frame due to extremely cold temperatures…The path of least resistance in my opinion will be to the upside eventually.”

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