Range-Bound Natural Gas May Need 'A Major Curveball' To Shake Up Prices

However, after four weeks in the red, gas futures on the New York Mercantile Exchange’s Henry Hub may see a change in fortunes this week as an early stretch of cold forces homes and businesses to turn on the heat, prompting utilities to burn more gas for power generation.

If weekly inventory data due at 10:30 AM ET today doesn’t show a monstrous build in gas stockpiles, then Henry Hub could finish Friday with its first weekly gain in five. As it is, analysts tracked by Investing.com expect the data from U.S. Energy Information Administration to show total gas in storage at 106 billion cubic feet at the close of last week, versus the previous week’s tally of 98 bcf.

Fleeting Joy For Gas Bulls As Upcoming Weather Not Cold Enough/h3

But even if gas prices don’t collapse by Friday, the joy for bulls may be fleeting. This is because weather forecasts down the line show temperatures could get milder before they turn colder. That could mean more storage builds and potentially weaker prices.

Yet, even in such bearish situations, Henry Hub futures may not break below the key $2 support gas bears are counting on. That’s because intermittent cold over the next couple of weeks could soften the impact of the current highs in gas production. U.S. gas output hit a near record high of 93.1 bcf per day just last week, data showed.

The surge in gas production has been both delightful and frustrating to bears who shorted the market at around $2.50, hoping for a steady crumble to under $2.

'Strong Sell' Recommendation, But With A Low Above $2/h3

While Investing.com has a “Strong Sell” recommendation for natural gas in its Daily Technical Outlook, the near-term bottom it predicts is also above $2, at $2.149.

At Wednesday’s settlement, the benchmark November front-month gas contract on Henry Hub settled at $2.303. Barring further slides, the contract could finish up 3.7% on the week.

Dan Myers, analyst at gas consultancy Gelber & Associates, laid out the conflicting supply-demand themes in a report he wrote on Wednesday:

“A developing colder-than-normal pattern in the central to eastern U.S. late in October, which will finally bring meaningful heating demand, has led to a corresponding increase in prices this week.”

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“Meanwhile, futures for December through March haven’t shown as strong of a response as storage still looks to reach comfortable levels before winter truly hits.”

Myers warns that the next two weeks in particular could feature storage additions higher than last year and the five-year average, before stronger heating demand kicks in from late autumn chill.

Gas Market In Reverie; 'Major Curveball' Needed/h3

Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, makes a similar point:

“Bottom line….production is growing, as is demand, which is why the market isn’t reacting to it.”

“The focus will be on weather until the data throws a major curveball as the current supply-demand suggests that prices should be weaker than $2.50 but not in a free fall under $2.”

Shelton estimated that Commodity Trading Advisors, which include hedge funds, were nearing a 80% short position and were closer to covering than adding to their bearish holdings.

He said prices should be firming soon on the back of a cooler outlook for November. “The true driver will be CTA short rolling,” he added.

Written By: Barani Krishnan