Bulls in the US natural gas market may be on their way to bigger paydays.
Trading mostly sideways since mid-June, gas futures on the New York Mercantile Exchange had their largest gain in six weeks on Wednesday after another lower-than-expected injection of the fuel into storage for winter heating. The 2.2% move was the biggest win of the day across 60 global commodity/macro futures tracked by Barchart.
More important, said analysts, was the settlement above $2.80 per million British thermal units for NYMEX’s front-month gas contract – a level that’s been hard for the market to hold lately despite winter reserves of the fuel standing at below the five-year average.
Despite thinner-than-forecast winter stockpile increases for four straight weeks, gas production has held at record highs this summer. With temperatures also above normal, the higher output has gone into generating more electricity to meet air conditioning demand.
High $3 Levels Over The Next Six Months?
Gas has had trouble rallying because many fear that if the present heat cools, demand for power will also drop off, and much of the high production will end up in underground caverns for the winter, further pressuring prices.
Notwithstanding that, Wednesday’s settlement of $2.819 per mmBtu brought the market into a potentially bullish territory where those long on gas could even bet on high $3 levels over the next six months – if inventory injections continue to surprise to the downside.
“If we’re lucky, we may see $3.50 to $3.75,” said Daniel Myers, analyst at Gelber & Associates in Houston. “The fundamentals are in place, especially with the low storage.”
Myers said many gas traders expect the current aggressive production to continue late in the year, and could be in for a “rude awakening” if the trend halts. Forecasts for higher stockpile injections in August and September were keeping such fears away for now, he said.
Even if gas were to remain around $2.75 through the fourth quarter, Myers sees a lock-in opportunity for those wanting to catch the wave higher. “These prices right now, especially below $3, are a pretty good buy. Further down the curve, at 2019, gas is pretty cheap, bargain deals really.”
His call aligns with Investing.com’s daily technicals which have a “Strong Buy” on NYMEX gas’ front-month September contract. Fibonacci patterns indicate first resistance at $2.828, second at $2.848 and third at $2.880.
The last time gas hit the high $3 levels was in January, during the 2017/18 winter, when record low temperatures were recorded in South Dakota, Indiana, Iowa, Illinois and Virginia. The year’s peak so far was $3.661, set on Jan 26.
inventory Deficit Could Reach Decade Low
Dominick Chirichella, director of risk management, trading and advisory for oil and gas at EMI DTN in New York, said the market had been discounting the growing inventory deficit for winter gas, and also missing the fact that the current high production couldn’t even bring caverns to the normal rate of weekly fills.
“The stock level at the start of the upcoming winter heating season could come in at a decade low level if the rate of fill does not increase strongly and quickly,” he said in a note of Wednesday.
Still, Chirichella said he was “neutral to cautiously bullish” on NYMEX gas, given weather concerns.
“The short-term weather pattern is projected to evolve back to normal temperatures in key parts of the US,” he added.
NatGasWeather.com said its tracking models through Aug 8 detected a cool front with showers and thunderstorms across the east-central US that would bring comfortable temperatures between the highs 70s and lower 80s, resulting in lighter demand for air conditioning.
Beyond next week, a weather system will weaken the ridge over the Midwest and Northeast, dropping highs into the 70s and 80s as showers sweep through the area, the forecaster added.