Natural Gas Needs to Climb Mid-$3 Wall to Sustain Rally

Mid-$3 may be the new normal for a while in natural gas after the mid-$2 trap seen most of this year for America’s favorite heating and cooling fuel appears to have been breached for good.

A slow-burn rally that began three weeks ago had taken the front-month gas futures contract on the New York Mercantile Exchange’s Henry Hub from a low of $2.55 per mmBtu, or million metric British thermal units, to a nine-month high of $3.45 on Tuesday.

The near 28% rally was the biggest winning streak for gas since a three-week run-up in July 2022 that delivered almost 40% to longs in the game.

Yet, the current rally driven by bullish changes in weather, relatively lower gas production, and better demand optics for liquefied natural gas may have hit a technical resistance wall at $3.50, charts for Henry Hub’s front-month contract show.

Charts by SKCharting.com with data powered by Investing.com

In fact, momentum on the downside could swing the gas pendulum back towards the lower end of $3 in the interim, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. He adds:

“Gas futures are undergoing consolidation below the immediate resistance of $3.50.  Momentum squeeze may be followed by a retest of the support areas of $3.27 and $3.17.”

Barring that, the rally in gas didn’t look exhausted as yet, said Dixit.

“The major outlook remains bullish, as long as the weekly close stays above the 50-week EMA, or Exponential Moving Average, of $3.35. That can bring the immediate upside target to the 200-week SMA, or Simple Moving Average, of $3.77.”

Fundamental Boosts/h2

There were also fundamental boosts to the market, with the latest being Bloomberg’s production estimate of nearly 101 billion cubic feet per day for Wednesday. Typically, output anywhere above 100 bcf per day would raise a red flag. Yet, in relative terms, this estimate was more than 1 bcf/d lower than 2023 highs, coming amid maintenance events in the Permian Basin and Appalachian.

Adding to the mix were threats of a resumption in the workers’ strike at Chevron (NYSE:CVX) Corp’s LNG export facilities in Australia and the latest conflagration in the Middle East where Chevron — again — was ordered by Israeli authorities to idle a major gas field on concerns over air strikes.

Near-term weather conditions in the US Northeast — the most closely-watched region in the United States for gas-driven heating and cooling  — also bolstered sentiment among bulls.

The gas market has been “underpinned from a near-term cooler temperature outlook”, with the Israel-Hamas war adding “some psychological ballast to gas traders’ bullishness,” observed analysts at The Schork Report.

After a round of chilly weather across the Northern Plains, Great Lakes, and the Northeast at the start of the week, cooler air lingered over the northern markets on Wednesday and was forecast to extend to the weekend, NatGasWeather said in a forecast carried by industry portal naturalgasintel.com.

The firm adds:

“An upstream cool shot/weather system will strengthen over the Rockies and Midwest” Wednesday and Thursday, “with rain and snow showers and lows of upper 20s to 40s.”

EBW Analytics Group noted that storage injections proved seasonally light over much of the summer and into early autumn.

That storage projection is key to what the US Energy Information Administration, or EIA, could report at 10:30 ET (14:30 GMT) as gas inventories for the week ended Oct. 6.

Modest US Storage Build Seen for Last Week/h2

In a poll ahead of the EIA report, Reuters said US utilities likely added a below-average 88 bcf to storage last week, versus the 125 bcf injected during the same week a year ago and the five-year (2018-2022) average increase of 93 bcf for this time of year.

In the prior week to Sept. 29, utilities added 86 bcf of gas into storage.

If accurate, the forecast for the week ended Oct. 6 would lift stockpiles of gas to 3.533 tcf, or trillion cubic feet, about 10% above the same week a year ago and some 5% above the five-year average.

There were 58 TTDs, or total degree days, last week compared with a 30-year normal of 65 TDDs for the period, data from LSEG showed.

TDDs measure the number of degrees a day's average temperature is above or below 65 degrees Fahrenheit (18 Celsius) to estimate demand to cool or heat homes and businesses.

Too Much Supply Still?/h2

Injections were held in check last week by scorching heat and strong cooling demand in Texas and neighboring states in the South Central region, those in the know said.

Still not at all held their breath over current storage levels in gas, with some saying there was too much supply for this time of year.

Said EBW’s senior analyst Eli Rubin:

“Our seasonal assessment remains bearish due to elevated natural gas storage and production near record highs, slashing shortage risks – resulting in a vastly better-supplied market than in the last two autumns.” 

Rubin noted that Canadian inventories were well-stocked as well, as an additional reserve. Even with a chilly October, the gas storage surplus to the five-year average could increase in coming weeks at current prices, with bullish price momentum likely to subside near term, he said, adding:

“Further, bearish power burn impacts from the recent price spike and resultant gas-to-coal switching may only become apparent in coming weeks, slashing 1.3 Bcf/d of price-induced demand.”

Analysts at BofA Global Research also anticipate a well-supplied market for the coming heating season.

“Gas storage levels outside the U.S. South Central region have been tracking near or above five-year high seasonal levels this year and may cause a reckoning in gas basis markets if winter turns out to be warmer than normal, as indicated by several forecasters,” the BofA team said.

Adding to the debate on temperatures, NatGasWeather said rainy systems would track across the Northern US through this weekend to the start of next week, potentially supporting regional demand with highs of upper 40s to 60s Fahrenheit.

By mid next week, however, benign conditions could prevail. The firm said that, from that point through late October, “weak high pressure will rule most of the US with nice highs of 50s to 80s.”

Exceptions include highs in the 90s in the Southwest deserts and cooler 40s across portions of the Great Lakes and Northeast.

Bearish, Instead of Bullish, Pressure From Hurricanes?/h2

Hurricane season, while yet to generate outsized impacts to either demand or supply in 2023, could create more bearish price pressure this week in the southern reaches of the Lower 48, according to AccuWeather projections carried by naturalgasintel.com.

The firm said the risk of a major tropical development in the Gulf of Mexico was low as of Wednesday, but “heavy rain is still in the cards” from a disturbance in the area this week.

Cool air and “intense rainfall is expected at times for many near the coast of the South and especially the Southeast” this week, Courtney Travis, AccuWeather’s senior meteorologist. 

“Tropical moisture will help fuel an area of heavy rainfall and bring about flooding concerns through Thursday,” Travis said, adding: “Widespread showers and thunderstorms are expected all along the Gulf Coast from Texas to the southern tip of Florida.”

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.