Natural Gas prices rose last week in response to high heat in several key areas in the United States. Although the market rallied, it stayed within the previous week’s wide range, suggesting investor indecision and impending volatility.
September natural gas settled at $2.971, up 0.114 or +3.99%.
Last week’s price action also strongly suggests the market is in the strong hands of some serious short-sellers who didn’t blink much when the weather services forecast some of the hottest temperatures of the year. They could be saying, “it’s summer, it’s supposed to be hot” which basically means “show me the demand”.
In other news, the U.S. Energy Information Administration reported working gas in storage was 2,945 Bcf as of Friday, July 7. This represents a net increase of 57 Bcf from the previous week. Traders were estimating around a 56 Bcf increase.
Stocks were 289 Bcf less than last year at this time and 172 Bcf above the five-year average of 2,773 Bcf. At 2,945 Bcf, total working gas is within the five-year historical range.
For those looking for a longer-term point of view, U.S. natural gas storage is expected to end the April-October injection season at a below-normal 3.7 trillion cubic feet (tcf) at the end of October. This compares with a five-year (2012-16) average of 3.9 tcf and falls well short of last year’s record high of 4.0 tcf at the end of the injection season.
Forecast
For several weeks, I had been saying that bullish traders were looking for the weather forecast to mention words and phrases similar to “high pressure dome” or “lingering heat”. Last week these words entered the forecasts. I may have gotten the long side right, but I completely underestimated the strength of the short side.
Last week’s price action strongly indicates the buying is not as strong as the selling pressure at current price levels. Early in the week, the buying was strong enough to fuel a rally off the previous week’s low at $2.830, but in hindsight, the move looked like short-covering by the weaker shorts reacting to the weather forecast.
The inability to follow-through to the upside after the initial rally and following the release of the EIA report, shows me that it is going to take a wave of speculative buying combined with aggressive short-covering to trigger breakout to the upside.
Last week’s weather forecast showed expectations of hot high pressure dominating most of the country until at least July 23. The price action suggests that the buying may get stronger if the same forecast is extended another 7 to 10 days or so. This may be enough to attract new buyers and encourage more shorts to cover their positions.