Natural gas trading outlook: futures head for weekly drop on expected cooling

Natural gas fell for a second day on Friday and headed for a weekly drop as weather forecasts called for a cooling across the eastern US in the first week of August after the next seven days widespread very warm to hot conditions.

Natural gas for delivery in August traded 0.32% lower at $2.807 per million British thermal units at 08:21 GMT, shifting in a daily range of $2.815 – $2.794. The contract slid 2.8% on Thursday to $2.816 per mBtu and is currently down 2.2% for the week.

The Energy Information Administration released a somewhat bullish inventory report on Thursday which initially caused a spike in prices but was followed by a sell-off through the close based on weather developments.

The government agency reported that US natural gas stockpiles rose by 68 billion cubic feet in the week ended July 17th, slightly below analysts median forecast of a 70-bcf gain. However, the EIA showed a reclassification from working gas to base gas of 7 bcf, which trimmed the number to 61 bcf. This compared to the five-year average gain of 53 bcf and the year-ago one of 92 bcf.

Total gas held in US storage hubs after the reclassification amounted to 2.828 trillion cubic feet, expanding a surplus to the five-year average of 2.747 trillion to 2.9% from 2.7% during the previous week. Supplies were also 28.2% above the year-ago stockpiles level of 2.206 trillion cubic feet.

Continued very warm to hot temperatures this week, particularly over the southern half of the country, will result in an even smaller build for next Thursdays report, with the July 30th reading expected to show an inventory gain of slightly over 50 bcf for the seven days ending July 24th. This compares to the five-year average stockpiles increase for the period of 48 bcf, while supplies rose by 88 bcf a year earlier.

Active weather

Bearish longer-term weather sentiment, however, was the main driving factor behind Thursdays decline, as the latest data showed more definitively a cooling arriving over the eastern US during the first week of August. Moreover, if the cooler conditions manage to extend into the second week of the month, this would prove very bearish as current expectations point to the return of high pressure over the East during the period.

Until then, however, short-term sentiment remains supportive to prices. Very warm to hot temperatures will spread northward out of the central US this weekend and through next Thursday, NatGasWeather.com said, introducing highs in the upper 80s and lower 90s over the Great Lakes and Northeast. The central and southern US will remain under the thumb of hot high pressure with afternoon highs in the mid 90s to 100s.

Portions of the Southeast, particularly Florida, will cool for several days this weekend as a slow moving weather system tracks through, while the West is also hit by a few systems with showers and seasonal readings. Overall, however, the US will be experiencing very warm to hot conditions the next seven days, resulting in high natural gas demand, compared to normal.

This will lead to another lean inventory build, most likely below the average, for the August 6th EIA report. Preliminary estimates call for an inventory gain of slightly over 40 bcf during the seven days ended July 31st, compared to the five-year average gain for the period of 53 bcf and the year-ago one of 83 bcf.

The main focus now falls on developments in the first week of August. The central and southern US, including Texas, will remain engulfed by hot temperatures but cooler air will infiltrate the eastern regions of the country, pushing readings to normal, or slightly below, and skewing sentiment to the bearish side. This will shift the ridge of hot high pressure over to the West, including California, resulting in above-usual temperatures for the region, NatGasWeather.com said. From there on, it will be of utmost importance to see whether high pressure manages to push back into the East in the second week of August, or bearish sentiment will persist.

Temperatures

According to AccuWeather.com, highs in New York on July 25-29th will range between 86 and 88 degrees Fahrenheit, above the usual 84, before rising to 90 degrees the next couple of days. Chicago will peak at 82-85 degrees through July 27th, compared to the average 84, followed by a jump to 86-88 degrees the next three days.

Down South, temperatures in Houston will max out at the toasty 98-102 degrees through July 29th, compared to the normal 93, followed by a drop to near-seasonal levels. On the West Coast, Los Angeles will peak at 81-84 degrees through July 27th, near the average 84, before jumping to 86-88 degrees the following five days.

Pivot points

According to Binary Tribune’s daily analysis, August natural gas futures’ central pivot point stands at $2.857. In case the contract penetrates the first resistance level at $2.910 per million British thermal units, it will encounter next resistance at $3.004. If breached, upside movement may attempt to advance to $3.057 per mBtu.

If the energy source drops below its S1 level at $2.763 per mBtu, it will next see support at $2.710. In case the second key support zone is breached, the power-station fuel’s downward movement may extend to $2.616 per mBtu.

In weekly terms, the central pivot point is at $2.864. The three key resistance levels are as follows: R1 – $2.940 R2 – $3.011, $3.087. The three key support levels are: S1 – $2.793, S2 – $2.717, S3 – $2.646.